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World Economic and Financial Surveys
Economic and Financial Surveys
World Economic Outlook
October 2015
Adjusting to Lower Commodity Prices
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©2015 International Monetary Fund
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World economic outlook (International Monetary Fund)
World economic outlook: a survey by the staff of the International Monetary Fund.—Washington, DC: International Monetary Fund, 1980–
v. ; 28 cm.—(1981–1984: Occasional paper / International Monetary Fund, 0251-6365).—(1986–: World economic and financial surveys, 0256-6877)
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1. Economic development—Periodicals. 2. Economic forecasting—Periodicals. 3. Economic policy—Periodicals. 4. International economic relations—Periodicals. I. International Monetary Fund. II. Series: Occasional paper (International Monetary Fund). III. Series: World economic and financial surveys.
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The World Economic Outlook (WEO) is a survey by the IMF staff published twice a year, in the spring and fall. The WEO is prepared by the IMF staff and has benefited from comments and suggestions by Executive Directors following their discussion of the report on September 21, 2015. The views expressed in this publication are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Directors or their national authorities.
Recommended citation: International Monetary Fund. 2015. World Economic Outlook: Adjusting to Lower Commodity Prices. Washington (October).
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Contents
Assumptions and Conventions
Further Information and Data
Preface
Foreword
Executive Summary
Chapter 1. Recent Developments and Prospects
Recent Developments and Prospects
Risks
Policies
Special Feature: Commodity Market Developments and Forecasts, with a Focus on Metals in the World Economy
Annex 1.1. Regional Projections
Scenario Box 1. A Structural Slowing in Emerging Market Economies
Box 1.1. What Is the Effect of Recessions?
Box 1.2. Small Economies, Large Current Account Deficits
Box 1.3. Capital Flows and Financial Deepening in Developing Economies
Box 1.SF.1. The New Frontiers of Metal Extraction: The North-to-South Shift
References
Chapter 2. Where Are Commodity Exporters Headed? Output Growth in the Aftermath of the Commodity Boom
Introduction
Commodity Terms-of-Trade Windfalls: A Model-Based Illustration
Five Decades of Evidence: Commodity Terms-of-Trade Cycles and Output
Sectoral Reallocation during Commodity Booms: Case Studies
Conclusions
Annex 2.1. Data Sources, Index Construction, and Country Groupings
Annex 2.2. Methodology for Dating Commodity Price Cycles
Annex 2.3. Stylized Facts and Event Studies
Annex 2.4. Local Projection Method
Box 2.1. The Not-So-Sick Patient: Commodity Booms and the Dutch Disease Phenomenon
Box 2.2. Commodity Booms and Public Investment
Box 2.3. Getting By with a Little Help from a Boom: Do Commodity Windfalls Speed Up Human Development?
Box 2.4. Do Commodity Exporters’ Economies Overheat during Commodity Booms?
References
Chapter 3. Exchange Rates and Trade Flows: Disconnected?
Introduction
From Exchange Rates to Trade: Historical Evidence
Disconnect or Stability?
Implications for the Outlook
Annex 3.1. Data
Annex 3.2. Estimation of Trade Elasticities
Annex 3.3. Derivation of the Marshall-Lerner Condition under Incomplete Pass-Through
Annex 3.4. Analysis of Large Exchange Rate Depreciation Episodes
Annex 3.5. Trade Elasticities over Time: Stability Tests
Box 3.1. The Relationship between Exchange Rates and Global-Value-Chain-Related Trade
Box 3.2. Measuring Real Effective Exchange Rates and Competitiveness: The Role of Global Value Chains
Box 3.3. Japanese Exports: What’s the Holdup?
References
Statistical Appendix
Assumptions
What’s New
Data and Conventions
Classification of Countries
General Features and Composition of Groups in the World Economic Outlook Classification
Table A. Classification by World Economic Outlook Groups and Their Shares in Aggregate GDP, Exports of Goods and Services, and Population, 2014
Table B. Advanced Economies by Subgroup
Table C. European Union
Table D. Emerging Market and Developing Economies by Region and Main Source of Export Earnings
Table E. Emerging Market and Developing Economies by Region, Net External Position, and Status as Heavily Indebted Poor Countries and Low-Income Developing Countries
Table F. Economies with Exceptional Reporting Periods
Table G. Key Data Documentation
Box A1. Economic Policy Assumptions Underlying the Projections for Selected Economies
List of Tables
Output (Tables A1–A4)
Inflation (Tables A5–A7)
Financial Policies (Table A8)
Foreign Trade (Table A9)
Current Account Transactions (Tables A10–A12)
Balance of Payments and External Financing (Table A13)
Flow of Funds (Table A14)
Medium-Term Baseline Scenario (Table A15)
World Economic Outlook, Selected Topics
IMF Executive Board Discussion of the Outlook, September 2015
Tables
Table 1.1. Overview of the World Economic Outlook Projections
Table 1.SF.1. World Crude Steel Production, 2014
Table 1.SF.2. Metal Trade Evolution
Table 1.SF.3. Net Metal Exports
Table 1.SF.1.1. Impact of Political Institutions on Mineral Discoveries
Table 1.2.1. Median Country Characteristics
Table 1.2.2. Cross-Sectional Current Account Models
Table 1.2.3. Profile of Countries with Large Current Account Deficits
Table 1.3.1. Gross Capital Inflows and Private Credit: Two-State Least-Squares Estimates
Annex Table 1.1.1. European Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.2. Asian and Pacific Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.3. Western Hemisphere Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.4. Commonwealth of Independent States Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.5. Middle East and North African Economies, Afghanistan, and Pakistan: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.6. Sub-Saharan African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Table 2.1. Commodity Exports
Annex Table 2.1.1. Data Sources
Annex Table 2.1.2. Commodity-Exporting Emerging Market and Developing Economies
Annex Table 2.4.1. Sample of Commodity Exporters Used in the Local Projection Method Estimations, 1960–2007
Annex Table 2.4.2. Country Coverage for Key Macroeconomic Variables in the Local Projection Method Estimations
Table 3.1. Exchange Rate Pass-Through and Price Elasticities
Annex Table 3.1.1. Data Sources
Annex Table 3.1.2. Economies Included in Estimation of Trade Elasticities
Annex Table 3.1.3. Economies Covered in the Trade in Value Added Database
Annex Table 3.1.4. Economies Included in the Rolling Regressions
Annex Table 3.4.1. Large Exchange Rate Depreciations Not Associated with Banking Crises
Annex Table 3.4.2. Large Exchange Rate Depreciations Associated with Banking Crises
Annex Table 3.5.1. Trade Elasticities over Time: Stability Tests
Table 3.1.1. Responses of Global-Value-Chain-Related Trade to the Real Effective Exchange Rate
Table A1. Summary of World Output
Table A2. Advanced Economies: Real GDP and Total Domestic Demand
Table A3. Advanced Economies: Components of Real GDP
Table A4. Emerging Market and Developing Economies: Real GDP
Table A5. Summary of Inflation
Table A6. Advanced Economies: Consumer Prices
Table A7. Emerging Market and Developing Economies: Consumer Prices
Table A8. Major Advanced Economies: General Government Fiscal Balances and Debt
Table A9. Summary of World Trade Volumes and Prices
Table A10. Summary of Current Account Balances
Table A11. Advanced Economies: Balance on Current Account
Table A12. Emerging Market and Developing Economies: Balance on Current Account
Table A13. Summary of Financial Account Balances
Table A14. Summary of Net Lending and Borrowing
Table A15. Summary of World Medium-Term Baseline Scenario
Online Tables
Table B1. Advanced Economies: Unemployment, Employment, and Real GDP per Capita
Table B2. Emerging Market and Developing Economies: Real GDP
Table B3. Advanced Economies: Hourly Earnings, Productivity, and Unit Labor Costs in Manufacturing
Table B4. Emerging Market and Developing Economies: Consumer Prices
Table B5. Summary of Fiscal and Financial Indicators
Table B6. Advanced Economies: General and Central Government Net Lending/Borrowing and General Government Net Lending/Borrowing Excluding Social Security Schemes
Table B7. Advanced Economies: General Government Structural Balances
Table B8. Emerging Market and Developing Economies: General Government Net Lending/Borrowing and Overall Fiscal Balance
Table B9. Emerging Market and Developing Economies: General Government Net Lending/Borrowing
Table B10. Selected Advanced Economies: Exchange Rates
Table B11. Emerging Market and Developing Economies: Broad Money Aggregates
Table B12. Advanced Economies: Export Volumes, Import Volumes, and Terms of Trade in Goods and Services
Table B13. Emerging Market and Developing Economies by Region: Total Trade in Goods
Table B14. Emerging Market and Developing Economies by Source of Export Earnings: Total Trade in Goods
Table B15. Summary of Current Account Transactions
Table B16. Emerging Market and Developing Economies: Summary of External Debt and Debt Service
Table B17. Emerging Market and Developing Economies by Region: External Debt by Maturity
Table B18. Emerging Market and Developing Economies by Analytical Criteria: External Debt by Maturity
Table B19. Emerging Market and Developing Economies: Ratio of External Debt to GDP
Table B20. Emerging Market and Developing Economies: Debt-Service Ratios
Table B21. Emerging Market and Developing Economies, Medium-Term Baseline Scenario: Selected Economic Indicators
Figures
Figure 1.1. Global Activity Indicators
Figure 1.2. Global Inflation
Figure 1.3. Commodity and Oil Markets
Figure 1.4. Financial Conditions in Advanced Economies
Figure 1.5. Advanced Economies: Monetary Conditions
Figure 1.6. Financial Conditions in Emerging Market Economies
Figure 1.7. Monetary Policies and Credit in Emerging Market Economies
Figure 1.8. Growth, Employment, and Labor Productivity in Advanced Economies
Figure 1.9. Fiscal Policies
Figure 1.10. GDP Growth Forecasts
Figure 1.11. External Sector
Figure 1.12. Capital Flows in Emerging Market Economies
Figure 1.13. Real Exchange Rates and Current Account Gaps
Figure 1.14. Risks to the Global Outlook
Figure 1.15. Recession and Deflation Risks
Figure 1.1.1. Advanced Economies: Real GDP
Figure 1.1.2. Portugal: Evolution of Log Real GDP and Extrapolated Trends
Figure 1.2.1. Sources of External Financing, Current Account Deficit Countries
Figure 1.2.2. Composition of Net International Investment Position, Current Account Deficit Countries
Figure 1.3.1. Gross Capital Inflows and Private Credit in Selected Low-Income Developing Countries
Scenario Figure 1. World Economic Outlook Stagnation Scenario
Figure 1.SF.1. Commodity Market Developments
Figure 1.SF.2. Metal Price Indices
Figure 1.SF.3. Production and Consumption of Metals
Figure 1.SF.4 Evolution of Metal Market
Figure 1.SF.5 Development of Metal Market
Figure 1.SF.6. China: Composition of Metal Use and Growth Rates by Sector
Figure 1.SF.7. China: Metal Imports
Figure 1.SF.8. Growth Rates of Metal Price Index
Figure 1.SF.1.1. Metal Deposit Discoveries in Latin America and the Caribbean and Sub-Saharan Africa
Figure 1.SF.1.2. Number of Metal Deposit Discoveries by Region and Decade
Figure 2.1. World Commodity Prices, 1960–2015
Figure 2.2. Average Growth in Commodity-Exporting versus Other Emerging Market and Developing Economies, 1990–2015
Figure 2.3. Real Income, Output, and Domestic Demand, 2000–10
Figure 2.4. Model Simulations: Macroeconomic Effects of a Commodity Boom
Figure 2.5. Consumption Dynamics with Overly Optimistic Commodity Price Expectations
Figure 2.6. Sovereign Bond Yield Spreads and the Commodity Terms of Trade
Figure 2.7. Identification of Cycles in the Commodity Terms of Trade: Three Country Examples
Figure 2.8. Event Studies: Average Annual Growth Rates of Key Macroeconomic Variables during Commodity Terms-of-Trade Upswings and Downswings
Figure 2.9. Variation in Average Output Growth between Upswings and Downswings: The Role of Policy Frameworks and Financial Depth
Figure 2.10. Most Recent Upswing: Average Real Growth Rates during Upswings and Downswings
Figure 2.11. Macroeconomic Variables in the Aftermath of Commodity Terms-of-Trade Shocks
Figure 2.12. Output in the Aftermath of Commodity Terms-of-Trade Shocks: Role of Income Level and Type of Community
Figure 2.13. Commodity Booms and Macroeconomic Indicators in Australia, Canada, and Chile
Figure 2.14. Growth of Capital and Labor by Sector: Boom versus Preboom Periods
Figure 2.15. Evolution of Activity in Nontradables Relative to Manufacturing, Commodity Exporters Relative to Commodity Importers
Figure 2.16. Total Factor Productivity Growth Decompositions
Figure 2.17. Investment and Total Factor Productivity Growth
Annex Figure 2.2.1. Characteristics, Amplitudes, and Durations of Cycles
Annex Figure 2.3.1. Commodity Intensity, Policy Frameworks, and Financial Depth: Commodity-Exporting Emerging Markets versus Low-Income Developing Countries
Annex Figure 2.3.2. Average Differences in Real Growth Rates between Upswings and Downswings
Figure 2.1.1. Manufacturing Export Performance
Figure 2.2.1. Long-Term Effects of Heightened Public Investment during Commodity Booms
Figure 2.3.1. Human Development Indicators
Figure 2.3.2. Comparing the Performance of Commodity and Noncommodity Exporters
Figure 2.3.3. Event Studies: Average Changes in Human Development Indicators during Upswings and Downswings
Figure 2.4.1. Output Gaps in Six Commodity Exporters
Figure 2.4.2. Changes in the Output Gap and Terms of Trade
Figure 2.4.3. Real-Time and Multivariate-Filter Estimates of 2007 Output Gaps
Figure 3.1. Recent Exchange Rate Movements in Historical Perspective
Figure 3.2. Long-Term Exchange Rate Pass-Through and Price Elasticities
Figure 3.3. Effect of a 10 Percent Real Effective Depreciation on Real Net Exports
Figure 3.4. Export Dynamics Following Large Exchange Rate Depreciations
Figure 3.5. Export Dynamics Following Large Exchange Rate Depreciations: The Role of Initial Economic Slack
Figure 3.6. Export Dynamics Following Large Exchange Rate Depreciations Associated with Banking Crises
Figure 3.7. Evolution of Global Value Chains
Figure 3.8. Trade Elasticities over Time in Different Regions
Figure 3.9. Ratios of Exports and Imports to GDP, 1990–2014
Figure 3.10. Export Dynamics Following Large Exchange Rate Depreciations: Through and After 1997
Figure 3.11. Illustrative Effect of Real Effective Exchange Rate Movements since January 2013 on Real Net Exports
Annex Figure 3.2.1. Exchange Rate Pass-Through Estimates: Comparison with Bussière, Delle Chiaie, and Peltonen 2014
Annex Figure 3.2.2. Income Elasticities of Imports and Exports
Annex Figure 3.4.1. Export Dynamics Following Large Exchange Rate Depreciations
Annex Figure 3.4.2. Export Dynamics Following Large Exchange Rate Depreciations Identified Based on the Real Effective Exchange Rate
Annex Figure 3.4.3. Export Dynamics Following Laeven and Valencia 2013 Currency Crises
Annex Figure 3.4.4. Export Dynamics Following Large Exchange Rate Depreciations: Role of Initial Output Gap
Figure 3.1.1. Decomposition of Gross Exports and Imports, 1995 versus 2011
Figure 3.1.2. Global Value Chain Trade Elasticities
Figure 3.2.1. Real Effective Exchange Rate Weights Assigned to China and Germany
Figure 3.2.2. Comparison of Conventional and Input-Output Real Effective Exchange Rates
Figure 3.3.1. Japan: Exchange Rate and Exports
Figure 3.3.2. Exchange Rate, Profits, and Pass-Through
Figure 3.3.3. Offshoring and Exports
Editor’s notes:
(October 1, 2015)
Note 44 on page 122 has been amended to correct the start date of the period covered from January 2012 to January 2013.
(October 7, 2015)
The final sentence of the second full bullet on page 4 has been amended. The final clause has been changed from “reflecting slower U.S. growth but also lackluster domestic demand” to read “reflecting slower U.S. growth and a drop in oil production.”
The fifth sentence of the final bullet in the first column of page 15 has been amended. The final clause has been changed from “with significant negative spillovers onto growth in large parts of the region given the size and interconnectedness of the Brazilian economy” to read instead “with negative spillovers on other parts of the region, especially Brazil’s trading partners in Mercosur.”
(October 13, 2015)
The last three sentences of the first full paragraph on page 21 have been replaced. The original text of these sentences read as follows:
Simulations using the IMF’s Global Projection Model, which draw on past shocks over a longer horizon, suggest a small decrease in the probability of a recession in the major advanced economies over a four-quarter horizon relative to April 2015 (Figure 1.15, panel 1). However, the risk of a recession is now higher in the Latin America 5 and the “rest of the world” group. This increase, which highlights the higher emerging market economy risks noted earlier in the chapter, reflects lower starting values for growth, given weaker growth in the second quarter of 2015 for these economies as a group and weaker near-term forecasts.
The amended text reads as follows:
Simulations using the IMF’s Global Projection Model, which draw on past shocks over a longer horizon, suggest a small increase in the probability of a recession in the major advanced economies and in the Latin America 5 economies over a four-quarter horizon relative to April 2015 (Figure 1.15, panel 1). This increase primarily reflects the lower starting values for growth for some of the economies and the somewhat lower growth forecast under the baseline. With the latter, the probability of negative shocks leading to a technical recession is higher compared to a situation in which the baseline forecast is stronger.
Assumptions and Conventions
A number of assumptions have been adopted for the projections presented in the World Economic Outlook (WEO). It has been assumed that real effective exchange rates remained constant at their average levels during July 27–August 24, 2015, except for those for the currencies participating in the European exchange rate mechanism II (ERM II), which are assumed to have remained constant in nominal terms relative to the euro; that established policies of national authorities will be maintained (for specific assumptions about fiscal and monetary policies for selected economies, see Box A1 in the Statistical Appendix); that the average price of oil will be $51.62 a barrel in 2015 and $50.36 a barrel in 2016 and will remain unchanged in real terms over the medium term; that the six-month London interbank offered rate (LIBOR) on U.S. dollar deposits will average 0.4 percent in 2015 and 1.2 percent in 2016; that the three-month euro deposit rate will average 0.0 percent in 2015 and 2016; and that the six-month Japanese yen deposit rate will yield on average 0.1 percent in 2015 and 2016. These are, of course, working hypotheses rather than forecasts, and the uncertainties surrounding them add to the margin of error that would in any event be involved in the projections. The estimates and projections are based on statistical information available through September 16, 2015.
The following conventions are used throughout the WEO:
… to indicate that data are not available or not applicable;
—between years or months (for example, 2014–15 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years or months (for example, 2014/15) to indicate a fiscal or financial year.
“Billion” means a thousand million; “trillion” means a thousand billion.
“Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
Data refer to calendar years, except in the case of a few countries that use fiscal years. Please refer to Table F in the Statistical Appendix, which lists the economies with exceptional reporting periods for national accounts and government finance data for each country.
For some countries, the figures for 2014 and earlier are based on estimates rather than actual outturns. Please refer to Table G in the Statistical Appendix, which lists the latest actual outturns for the indicators in the national accounts, prices, government finance, and balance of payments indicators for each country.
Data for Lithuania are now included in the euro area aggregates, but they were excluded in the April 2015 WEO.
Projections for Greece are based on data available as of August 12, 2015.
As in the April 2015 WEO, data for Syria are excluded from 2011 onward because of the ongoing conflict and the related lack of data.
In the tables and figures, the following conventions apply:
If no source is listed on tables and figures, data are drawn from the WEO database.
When countries are not listed alphabetically, they are ordered on the basis of economic size.
Minor discrepancies between sums of constituent figures and totals shown reflect rounding.
As used in this report, the terms “country” and “economy” do not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
Composite data are provided for various groups of countries organized according to economic characteristics or region. Unless noted otherwise, country group composites represent calculations based on 90 percent or more of the weighted group data.
The boundaries, colors, denominations, and any other information shown on the maps do not imply, on the part of the International Monetary Fund, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries.
Further Information and Data
This version of the World Economic Outlook (WEO) is available in full through the IMF eLibrary (www.elibrary.imf.org) and the IMF website (www.imf.org). Accompanying the publication on the IMF website is a larger compilation of data from the WEO database than is included in the report itself, including files containing the series most frequently requested by readers. These files may be downloaded for use in a variety of software packages.
The data appearing in the World Economic Outlook are compiled by the IMF staff at the time of the WEO exercises. The historical data and projections are based on the information gathered by the IMF country desk officers in the context of their missions to IMF member countries and through their ongoing analysis of the evolving situation in each country. Historical data are updated on a continual basis as more information becomes available, and structural breaks in data are often adjusted to produce smooth series with the use of splicing and other techniques. IMF staff estimates continue to serve as proxies for historical series when complete information is unavailable. As a result, WEO data can differ from those in other sources with official data, including the IMF’s International Financial Statistics.
The WEO data and metadata provided are “as is” and “as available,” and every effort is made to ensure their timeliness, accuracy, and completeness, but it cannot be guaranteed. When errors are discovered, there is a concerted effort to correct them as appropriate and feasible. Corrections and revisions made after publication are incorporated into the electronic editions available from the IMF eLibrary (www.elibrary.imf.org) and on the IMF website (www.imf.org). All substantive changes are listed in detail in the online tables of contents.
For details on the terms and conditions for usage of the WEO database, please refer to the IMF Copyright and Usage website (www.imf.org/external/terms.htm).
Inquiries about the content of the World Economic Outlook and the WEO database should be sent by mail, fax, or online forum (telephone inquiries cannot be accepted):
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Preface
The analysis and projections contained in the World Economic Outlook are integral elements of the IMF’s surveillance of economic developments and policies in its member countries, of developments in international financial markets, and of the global economic system. The survey of prospects and policies is the product of a comprehensive interdepartmental review of world economic developments, which draws primarily on information the IMF staff gathers through its consultations with member countries. These consultations are carried out in particular by the IMF’s area departments—namely, the African Department, Asia and Pacific Department, European Department, Middle East and Central Asia Department, and Western Hemisphere Department—together with the Strategy, Policy, and Review Department, the Monetary and Capital Markets Department, and the Fiscal Affairs Department.
The analysis in this report was coordinated in the Research Department under the general direction of Olivier Blanchard, Economic Counsellor and Director of Research. The project was directed by Gian Maria Milesi-Ferretti, Deputy Director, Research Department, and Thomas Helbling, Division Chief, Research Department.
The primary contributors to this report were Aqib Aslam, Samya Beidas-Strom, Rudolfs Bems, Oya Celasun, Sinem Kılıç Çelik, Zsóka Kóczán, Daniel Leigh, Weicheng Lian, Marcos Poplawski-Ribeiro, and Viktor Tsyrennikov.
Other contributors include Rabah Arezki, Eugenio Cerutti, Kevin Cheng, Filippo Gori, Bertrand Gruss, Ben Hunt, Joong Shik Kang, Douglas Laxton, Bin Grace Li, Nan Li, Akito Matsumoto, Susanna Mursula, Carolina Osorio-Buitrón, Andrea Presbitero, Frederik Toscani, Rachel van Elkan, Hou Wang, Fan Zhang, and Hongyan Zhao.
Gavin Asdorian, Vanessa Diaz Montelongo, Rachel Fan, Hao Jiang, Christina Liu, Olivia Ma, Rachel Szymanski, and Hong Yang provided research assistance. Angela Espiritu, Mitko Grigorov, Mahnaz Hemmati, Toh Kuan, Trevor Meadows, Emory Oakes, Nicholas Tong, Richard Watson, Jilun Xing, and Yuan Zeng provided technical support. Alimata Kini Kaboré and Maria Jovanović were responsible for word processing. Michael Harrup from the Communications Department led the editorial team and managed the report’s production, with support from Linda Griffin Kean and Joe Procopio and editorial assistance from Lucy Scott Morales, Linda Long, Sherrie Brown, Gregg Forte, Nancy Morrison, and EEI Communications.
The analysis has benefited from comments and suggestions by staff members from other IMF departments, as well as by Executive Directors following their discussion of the report on September 21, 2015. However, both projections and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to their national authorities.
Foreword
Six years after the world economy emerged from its broadest and deepest postwar recession, a return to robust and synchronized global expansion remains elusive. The revised forecasts in this latest World Economic Outlook report underscore the challenges all countries face. Despite considerable differences in country-specific outlooks, the new forecasts mark down expected near-term growth rates marginally, but nearly across the board. Moreover, downside risks to the world economy appear more pronounced than they did just a few months ago.
Near-term economic growth still looks stronger in advanced economies, compared with the recent past, but weaker in the emerging market and developing economies that account for a growing share of world output and will still account for the lion’s share of world growth. Within advanced economies, receding legacies of recent crises, coupled with protracted monetary policy support and a return to fiscal neutrality, have underpinned generally accelerating output and falling unemployment, although deflationary pressures remain. Recovery is most advanced in the United States and the United Kingdom, where monetary policy looks likely to tighten soon, but is more tentative in the euro area and Japan. In countries outside of the advanced economies, the sources of slower growth are diverse, ranging from commodity price declines (which are also affecting a few advanced economies adversely), to overhangs from past rapid credit growth, to political turmoil. Of course, countries with multiple diagnoses are faring worst, in some cases also facing higher inflation. For emerging market and developing economies as a whole, our forecast is that 2015 will mark the fifth consecutive year of declining growth.
What underpins forecasts of moderating growth? First, the ongoing experience of slow productivity growth suggests that long-run potential output growth may have fallen broadly across economies. Persistently low investment helps explain limited labor productivity and wage gains, although the joint productivity of all factors of production, not just labor, has also been slow. Low aggregate demand is one factor that discourages investment, as the last World Economic Outlook report showed. Slow expected potential growth itself dampens aggregate demand, further limiting investment, in a vicious circle. Aging populations further restrain investment in a number of countries; in some others, institutional shortcomings or political instability are deterrents. In its more extreme forms, political conflict has created a large global stock of displaced persons, both within and across borders. The economic and social costs are immense.
Chapter 1 suggests that recessions may have a permanent negative effect not only on trend productivity levels, but on trend productivity growth. This mechanism would make current low productivity forecasts look in part like products of the post-2007 turbulence. Some economic historians advance the idea that the postwar global growth experience largely reflects diminishing returns along the extensive margin of technological innovation, punctuated temporarily by the entry of China and the former nations of the Soviet Union into the global market economy and by the information and communications technology revolution. Others counter that transformative innovation continues in many areas, from robotics to bioengineering. But like electrification over a century ago, these advances may take decades to embody in commercial production processes whose outputs are measured in national income. Only time can resolve these debates.
For countries that export oil and other commodities, changes in prices affect both the output gap and potential output itself, so recent movements in commodity prices also inform the near-term and longer-term output forecasts. Those movements have been dramatic, in part because of changes in China’s economy, and affect low-income commodity exporters with particular force. Now the world’s most important importer of metals, China maintained very rapid growth rates during the 2000s through 2011; as commodity prices rose, exporters invested heavily in capacity, fueling domestic growth. China’s leadership has recently targeted lower growth rates, however, as it seeks to rebalance its formerly export- and investment-driven economy in favor of consumption, including of services. As Chapters 1 and 2 document, many real commodity prices, notably those of metals, have fallen from peaks reached in 2011, and fell particularly sharply in the recent weeks of financial volatility starting in mid-August. It remains unclear, at the time of publication, if the recent declines represent a downward overshooting, but the effects of earlier reductions are already reflected in commodity exporter growth. Chapter 2 estimates that on average about a third of the resulting growth reductions are attributable to the structural component of growth, mostly via reduced investment.
Commodity exporters in particular have seen sharp depreciations of their currencies, but a general trend of reduced financial inflows to emerging markets has resulted in more generalized depreciation against the U.S. dollar, euro, and yen. Chapter 3 suggests that these exchange rate changes should be associated with growing net exports for the depreciating countries, a development that is part of the natural adjustment process to differential growth rates that flexible exchange rates promote. Although one result may be an increase in the current account deficits of some advanced economies with relatively good growth performance, it is important that these exchange rate adjustments be seen as the natural shock absorbers they typically are rather than as intentional acts of “currency war.” Indeed, past attempts by emerging markets to fix their exchange rates in the face of large financial outflows had quite negative consequences for global financial stability.
Large exchange rate depreciations carry the risk of negative balance sheet effects. A notable potential pressure point is offshore foreign-currency borrowing by emerging market corporations. Counteracting such risks are substantial reserve buffers, greater external equity finance, and a growing trend of domestic-currency denomination of onshore loans. Of course, other risks abide—renewed concerns about China’s growth potential, Greece’s future in the euro area, the impact of sharply lower oil prices, and contagion effects could be sparks for market volatility. In the advanced economies and in China, deflationary pressures, which continue to slow balance sheet adjustment, have not been entirely banished.
No single set of policy prescriptions is suitable for every country seeking to improve growth performance or build resilience. But some familiar general principles still apply in light of the shared challenges that countries face. Emerging market and developing economies need to be ready for monetary policy normalization by the United States. Advanced economies must continue to deal with crisis legacies where they persist. At the same time, monetary accommodation should continue where output gaps are negative, supplemented by fiscal measures where fiscal space permits. In particular, the case for infrastructure investment seems compelling at a time of very low long-term real interest rates. Investment is one way to enhance potential output growth, but targeted structural reforms can also play an important positive role. Such reforms help not only to enhance future growth, but to increase the resilience of growth. They can help low-income countries to diversify their export bases. In all countries, continued strengthening of micro- and macro-prudential policy frameworks will also support resilience to economic shocks, whether originating domestically or from abroad.
Maurice Obstfeld
Economic Counsellor
Executive Summary
Global growth for 2015 is projected at 3.1 percent, 0.3 percentage point lower than in 2014, and 0.2 percentage point below the forecasts in the July 2015 World Economic Outlook (WEO) Update. Prospects across the main countries and regions remain uneven. Relative to last year, the recovery in advanced economies is expected to pick up slightly, while activity in emerging market and developing economies is projected to slow for the fifth year in a row, primarily reflecting weaker prospects for some large emerging market economies and oil-exporting countries. In an environment of declining commodity prices, reduced capital flows to emerging markets and pressure on their currencies, and increasing financial market volatility, downside risks to the outlook have risen, particularly for emerging market and developing economies.
Global growth remains moderate—and once again more so than predicted a few months earlier. Although country-specific shocks and developments play a role, the persistently modest pace of recovery in advanced economies and the fifth consecutive year of growth declines in emerging markets suggest that medium-term and long-term common forces are also importantly at play. These include low productivity growth since the crisis, crisis legacies in some advanced economies (high public and private debt, financial sector weakness, low investment), demographic transitions, ongoing adjustment in many emerging markets following the postcrisis credit and investment boom, a growth realignment in China—with important cross-border repercussions—and a downturn in commodity prices triggered by weaker demand as well as higher production capacity. Chapter 2 of this WEO report and the Commodities Special Feature in Chapter 1 examine in detail causes and implications of the commodity price downturn, while the October 2015 Fiscal Monitor examines the role of fiscal policy and fiscal policy frameworks in managing commodity price volatility.
Financial market volatility spiked in August, following the depreciation of the renminbi, with an increase in global risk aversion, weakening currencies for many emerging markets, and a sharp correction in equity prices worldwide. Temporary surges in volatility had earlier been associated with events surrounding Greek debt negotiations and the sharp stock market decline in China and subsequent policy measures by the Chinese authorities in June–July. With the first increase in U.S. policy rates approaching and a worsening of the global outlook, financial conditions for emerging markets have tightened since the spring, especially in recent weeks: dollar bond spreads and long-term local-currency bond yields have increased by 50 to 60 basis points on average, and stock prices are weaker, while exchange rates have depreciated or come under pressure. Financial conditions in advanced economies continue in contrast to be easy, and real interest rates remain low even as the policy rate liftoff approaches in the United States and the United Kingdom.
Commodity prices have weakened, particularly in recent weeks. After increasing in the spring from their January trough, oil prices have declined sharply, reflecting resilient supply, the prospects of higher future output following the nuclear deal with the Islamic Republic of Iran, and weaker global demand. Metal prices have also fallen on concerns about global demand, especially the slowdown in commodity-intensive investment and manufacturing activity in China, but also owing to increases in supply following the past mining investment boom.
For many commodity exporters with flexible exchange rate regimes, weakening commodity prices have triggered sizable currency depreciation. But emerging market currencies more generally have seen sharp depreciations since the spring, particularly in August, while exchange rate movements across major advanced economy currencies have been relatively modest in recent months compared to the August 2014–March 2015 period. These realignments across floating-rate currencies have reflected to an important extent the evolution of underlying fundamentals—countries with weakening growth prospects and worsening terms of trade are facing currency depreciation pressures as part of global adjustment. As discussed in Chapter 3, countries experiencing sharp and persistent exchange rate movements will likely see notable changes in their net external demand.
These global factors—and country-specific developments—point to a somewhat weaker recovery in 2015 and 2016 than previously envisaged, and to higher downside risks.
Growth in advanced economies is projected to increase modestly this year and next year. This year’s developments reflect primarily a strengthening of the modest recovery in the euro area and a return to positive growth in Japan, supported by declining oil prices, accommodative monetary policy, and in some cases, currency depreciation. The pickup in advanced economies is tempered by lower growth in commodity exporters—particularly Canada and Norway—and in Asia outside of Japan (in particular, Korea and Taiwan Province of China). Unemployment is declining, but underlying productivity growth remains weak, including in the United States, where the recovery is more entrenched. This heightens concern about the medium-term outlook. Some pickup in growth is expected in 2016 (especially in North America), but medium-term prospects remain subdued, reflecting a combination of lower investment, unfavorable demographics, and weak productivity growth. The recent further decline in oil prices, as well as in prices of other commodities, should support demand in the majority of advanced economies that are net commodity importers, but the slowdown in emerging markets will imply weaker exports.
The renewed declines in commodity prices will again put downward pressure on headline inflation in advanced economies in the coming months and could delay the expected pickup in core inflation as the recovery progresses. While core inflation has remained more stable, it generally is still much below central bank objectives. The outlook is for inflation to remain subdued, notwithstanding declining unemployment and weaker medium-term growth potential.
Growth prospects in emerging markets are very different across countries and regions, but the outlook is generally weakening, with growth projected to decline for the fifth year in a row. This reflects a combination of factors: weaker growth in oil exporters; a slowdown in China with less reliance on import-intensive investment; adjustment in the aftermath of credit and investment booms; and a weaker outlook for exporters of other commodities, including in Latin America, following declines in other commodity prices, as well as geopolitical tensions and domestic strife in a number of countries.
For most emerging market economies, external conditions are becoming more difficult. While currency depreciation will help net exports, the “pull” from advanced economies will be somewhat more modest than previously forecast, given their weak recovery and moderate prospects for medium-term growth. Capital flows to emerging markets have slowed in recent quarters, and the liftoff of U.S. policy rates from the zero lower bound is likely to be associated with some tightening of external financial conditions. And while the growth slowdown in China is so far in line with forecasts, its cross-border repercussions appear greater than previously envisaged. This is reflected in weakening commodity prices (especially those for metals) and reduced exports to China (particularly in some east Asian economies).
Growth in emerging market and developing economies is projected to rebound in 2016. This reflects mostly a less deep recession or a partial normalization of conditions in countries in economic distress in 2015 (including Brazil, Russia, and some countries in Latin America and in the Middle East), spillovers from the stronger pickup in activity in advanced economies, and the easing of sanctions on the Islamic Republic of Iran. China’s growth is projected to slow further, albeit gradually.
The weakness in commodity prices, slower-than-expected global growth, and the prospect of tighter global financial conditions weigh on the outlook for low-income countries. Some have been running large current account deficits, benefiting from easy access to foreign savings and abundant foreign direct investment, especially in resource-rich countries, and they are hence particularly vulnerable to external financial shocks.
The balance of risks is still tilted to the downside. Lower oil and other commodity prices could provide some upside to demand in commodity importers, but complicate the outlook for commodity exporters, some of which already face strained initial conditions. The Chinese authorities face difficult trade-offs in their objectives of achieving a transition to more consumption-driven growth without activity slowing too much, while also reducing financial vulnerabilities and implementing reforms to strengthen the role of market forces in the economy. Emerging markets remain vulnerable in the short term to further declines in commodity prices and sharp appreciation of the U.S. dollar, which could further strain corporate balance sheets in some countries. Increased financial market volatility can pose financial stability challenges in advanced economies (for instance, if accompanied by a sudden decompression of risk premiums), with substantial spillovers onto emerging markets, including through tighter financial conditions and a reversal of capital flows.
The main medium-term risk for advanced economies is a further decline of already-low growth into near stagnation, particularly if global demand falters further as prospects weaken for emerging market and developing economies. In this context, persistently below-target inflation could become more entrenched. In emerging markets, medium-term risks come from spillovers from a “hard landing” or much slower potential growth in China, or lower potential growth more generally.
Raising both actual and potential output through a combination of demand support and structural reforms continues to be the economic policy priority. In advanced economies, accommodative monetary policy remains essential, alongside macroprudential policies to contain financial sector risks as needed. Countries with fiscal space and sizable output gaps or significant reliance on net external demand should ease their fiscal stance in the near term, especially through increased infrastructure investment. Indeed, to the extent that demand support is able to boost confidence and investment, which has been lagging in many advanced economies, this would also contribute to higher potential output. The structural reform agenda is country specific, but its main planks are measures to strengthen labor force participation and trend employment, facilitate labor market adjustment, tackle legacy debt overhang, and lower barriers to entry in product markets, especially in services.
Emerging market and developing economies face a difficult trade-off between supporting demand amid slowing growth—actual and potential—and reducing vulnerabilities in a more difficult external environment. Many economies have eased macroeconomic policies in response. The scope for further easing varies considerably across countries, however, given differences in growth performance, macroeconomic conditions, and sensitivity to commodity price shocks, as well as external, financial, and fiscal vulnerabilities.
In oil importers, lower oil prices have reduced price pressures and external vulnerabilities, which will ease the burden on monetary policy. These positive effects are, however, offset in oil importers that export other commodities by weaker export prices and the ensuing exchange rate depreciation.
In oil exporters without fiscal space, lower oil revenues require a reduction in public spending. For those with space, it is appropriate to adjust the fiscal position gradually, but medium-term adjustment plans should be formulated and initiated to maintain policy credibility.
In commodity-exporting countries with flexible exchange rate regimes, currency depreciation can help offset the demand impact of terms-of-trade losses, but sharp exchange rate changes can in some countries exacerbate vulnerabilities associated with high corporate leverage and foreign-currency exposure.
Structural reforms to raise productivity and remove bottlenecks to production are urgently needed in many economies.