World Economic Outlook, September 2011 : Slowing Growth, Rising Risks

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Front Matter

International Monetary Fund. Research Dept.
Published Date:
September 2011
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    ©2011 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)

    Semiannual. Some issues also have thematic titles.

    Has occasional updates, 1984—

    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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    Correction to Table 1.3.2 in Chapter 1, Box 3

    The logit coefficient for “Equity Price Change in Quarter t (Change in quarterly average equity price index)” for the United States in column (1) wrongly appears as -1.181*** but should instead be -0.181***.


    A number of assumptions have been adopted for the projections presented in the World Economic Outlook. It has been assumed that real effective exchange rates remained constant at their average levels during July 18–August 15, 2011, except 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 $103.20 a barrel in 2011 and $100.00 a barrel in 2012 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 2011 and 0.5 percent in 2012; that the three-month euro deposit rate will average 1.3 percent in 2011 and 1.2 percent in 2012; and that the six-month Japanese yen deposit rate will yield on average 0.5 percent in 2011 and 0.3 percent in 2012. 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 early September 2011.

    • The following conventions are used throughout the World Economic Outlook:

    • … to indicate that data are not available or not applicable;

    • — between years or months (for example, 2010–11 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

    • / between years or months (for example, 2010/11) to indicate a fiscal or financial year.

    • “Billion” means a thousand million; “trillion” means a thousand billion.

    • “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

    Data for Estonia are now included in the aggregates for the euro area and advanced economies.

    As in the April 2011 World Economic Outlook, WEO aggregated data exclude Libya for the projection years due to the uncertain political situation.

    Starting with the September 2011 World Economic Outlook, Guyana and Suriname are classified as members of the South America region and Belize as a member of the Central America region. Previously, they were members of the Caribbean region.

    • For Sudan, the projections for 2011 and later exclude South Sudan.

    • In figures and tables, shaded areas indicate IMF staff projections.

    • 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 otherwise noted, 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.


    This version of the World Economic Outlook is available in full on the IMF’s website, Accompanying it on the 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 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, but not guarantee, their timeliness, accuracy, and completeness. When errors are discovered, there is a concerted effort to correct them as appropriate and feasible. For details on the terms and conditions for usage of the WEO database, please refer to the IMF Copyright and Usage website,

    Inquiries about the content of the World Economic Outlook and the WEO database should be sent by mail, forum, or fax (telephone inquiries cannot be accepted) to

    World Economic Studies Division

    Research Department

    International Monetary Fund

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    Forum address: Fax: (202) 623-6343


    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 Jorg Decressin, Senior Advisor, Research Department and Rupa Duttagupta, Deputy Division Chief, Research Department. The primary contributors to this report are Abdul Abiad, John Bluedorn, Jaime Guajardo, Thomas Helbling, Daniel Leigh, Andrea Pescatori, Shaun Roache, Marco E. Terrones, Petia Topalova, and John Simon. Other contributors include Ali Alichi, Luis Catão, Ondra Kamenik, Heejin Kim, Michael Kumhof, Douglas Laxton, Prakash Loungani, Gian Maria Milesi-Ferretti, Rafael Portillo, and Felipe Zanna. Toh Kuan, Gavin Asdorian, Shan Chen, Angela Espiritu, Laura Feiveson, João Jalles, Murad Omoev, Katherine Pan, David Reichsfeld, Marina Rousset, Andy Salazar, Min Kyu Song, Ercument Tulun, and Su Wang provided research assistance. Kevin Clinton provided comments and suggestions. Tingyun Chen, Mahnaz Hemmati, Emory Oakes, Rajesh Nilawar, and Steve Zhang managed the database and the computer systems. Shanti Karunaratne, Skeeter Mathurin, and Cristina Tumale were responsible for word processing. Linda Griffin Kean of the External Relations Department edited the manuscript and coordinated the production of the publication. External consultants Anastasia Francis, Aleksandr Gerasimov, Wendy Mak, Shamiso Mapondera, Nhu Nguyen, and Pavel Pimenov provided additional technical support.

    The analysis has benefited from comments and suggestions by staff from other IMF departments, as well as by Executive Directors following their discussion of the report on August 31, 2011. 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.


    Relative to our previous World Economic Outlook last April, the economic recovery has become much more uncertain. The world economy suffers from the confluence of two adverse developments. The first is a much slower recovery in advanced economies since the beginning of the year, a development we largely failed to perceive as it was happening. The second is a large increase in fiscal and financial uncertainty, which has been particularly pronounced since August. Each of these developments is worrisome—their combination and their interactions more so. Strong policies are urgently needed to improve the outlook and reduce the risks.

    Growth, which had been strong in 2010, decreased in 2011. This slowdown did not initially cause too much worry. We had forecast some slowdown, due to the end of the inventory cycle and fiscal consolidation. One-time events, from the earthquake and tsunami in Japan to shocks to the supply of oil, offered plausible explanations for a further slowdown. And the initial U.S. data understated the size of the slowdown itself. Now that the numbers are in, it is clear that more was going on.

    What was going on was the stalling of the two rebalancing acts, which we have argued in many previous issues of the World Economic Outlook are needed to deliver “strong, balanced, and sustainable growth.”

    Take first internal rebalancing: What is needed is a shift from fiscal stimulus to private demand. Fiscal consolidation is indeed taking place in most advanced economies (although not in Japan). But private demand is not taking the relay. The reasons vary, depending on the country. But tight bank lending, the legacy of the housing boom, and high leverage for many households all turn out to be putting stronger brakes on the recovery than we anticipated.

    Turn to external rebalancing: Advanced economies with current account deficits, most notably the United States, need to compensate for low domestic demand through an increase in foreign demand. This implies a symmetric shift away from foreign demand toward domestic demand in emerging market economies with current account surpluses, most notably China. This rebalancing act is not taking place. While imbalances decreased during the crisis, this was due more to a large decrease in output in advanced relative to emerging market economies than to structural adjustment in these economies. Looking forward, the forecast is for an increase rather than a decrease in imbalances.

    Now turn to the second adverse development, increased fiscal and financial uncertainty: Markets have clearly become more skeptical about the ability of many countries to stabilize their public debt. For some time, their worries were mostly limited to a few small countries on the periphery of Europe. As time has passed, and as growth prospects have dimmed, their worries have extended to more European countries and to countries beyond Europe—from Japan to the United States. Worries about sovereigns have translated into worries about the banks holding these sovereign bonds, mainly in Europe. These worries have led to a partial freeze of financial flows, with banks keeping high levels of liquidity and tightening lending. Fear of the unknown is high. Stock prices have fallen. These will adversely affect spending in the months to come. Indeed, August numbers indicate that this is already happening.

    Low underlying growth and fiscal and financial linkages may well feed back on each other, and this is where the risks are. Low growth makes it more difficult to achieve debt sustainability and leads markets to worry even more about fiscal stability. Low growth also leads to more nonperforming loans and weakens banks. Front-loaded fiscal consolidation in turn may lead to even lower growth. Weak banks and tight bank lending may have the same effect. Weak banks and the potential need for more capital lead to more worry about fiscal stability. Downside risks are very real.

    I have been focusing so far on advanced economies. The reason is that, until now, emerging market economies have been largely immune to these adverse developments. They have had to deal with volatile capital flows, but in general have continued to sustain high growth. Indeed, some are close to overheating, although prospects are more uncertain again for many others. Under the risk scenarios, they may well suffer more adverse export conditions and even more volatile capital flows. Low exports and, perhaps, lower commodity prices will also create challenges for low-income countries.

    In light of the weak baseline and high downside risks, strong policy action is of the essence. It must rely on three main legs.

    The first leg is fiscal policy. Fiscal consolidation cannot be too fast or it will kill growth. It cannot be too slow or it will kill credibility. The speed must depend on individual country circumstances, but the key continues to be credible medium-term consolidation. Some countries need substantial outside help to succeed. Going beyond fiscal policy, measures to prop up domestic demand, ranging from continued low interest rates, to increased bank lending, to resolution programs for housing, are also of the essence.

    The second leg is financial measures. Fiscal uncertainty will not go away overnight. And even under the most optimistic assumptions, growth in advanced economies will remain low for some time. During that time, banks have to be made stronger, not only to increase bank lending and baseline growth, but also—and more important—to reduce risks of vicious feedback loops. For a number of banks, especially in Europe, this is likely to require additional capital buffers, either from private or from public sources.

    The third leg is external rebalancing. It is hard to see how, even with the policy measures listed above, domestic demand in the United States and other economies hit by the crisis can, by itself, ensure sufficient growth. Thus, exports from the United States and crisis-hit economies must increase, and, by implication, net exports from the rest of the world must decrease. A number of Asian economies, in particular China, have large current account surpluses and have indicated plans to rebalance from foreign to domestic demand. These plans cannot be implemented overnight. But they must be implemented as fast as possible. Only with this global rebalancing can we hope for stronger growth in advanced economies and, by implication, for the rest of the world.

    Olivier Blanchard

    Economic Counsellor


    The global economy is in a dangerous new phase. Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing. Against a backdrop of unresolved structural fragilities, a barrage of shocks hit the international economy this year. Japan was struck by the devastating Great East Japan earthquake and tsunami, and unrest swelled in some oil-producing countries. At the same time, the handover from public to private demand in the U.S. economy stalled, the euro area encountered major financial turbulence, global markets suffered a major sell-off of risky assets, and there are growing signs of spillovers to the real economy. The structural problems facing the crisis-hit advanced economies have proven even more intractable than expected, and the process of devising and implementing reforms even more complicated. The outlook for these economies is thus for a continuing, but weak and bumpy, expansion. Prospects for emerging market economies have become more uncertain again, although growth is expected to remain fairly robust, especially in economies that can counter the effect on output of weaker foreign demand with less policy tightening.

    World Economic Outlook (WEO) projections indicate that global growth will moderate to about 4 percent through 2012, from over 5 percent in 2010. Real GDP in the advanced economies is projected to expand at an anemic pace of about 1½ percent in 2011 and 2 percent in 2012, helped by a gradual unwinding of the temporary forces that have held back activity during much of the second quarter of 2011. However, this assumes that European policymakers contain the crisis in the euro area periphery, that U.S. policymakers strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that volatility in global financial markets does not escalate. Moreover, the removal of monetary accommodation in advanced economies is now expected to pause. Under such a scenario, emerging capacity constraints and policy tightening, much of which has already happened, would lower growth rates in emerging and developing economies to a still very solid pace of about 6 percent in 2012.

    The risks are clearly to the downside, and two warrant particular attention from policymakers:

    • The first is that the crisis in the euro area runs beyond the control of policymakers, notwithstanding the strong policy response agreed at the July 21, 2011, EU summit. Policymakers must swiftly ratify the commitments made at the July summit, and in the meantime, the European Central Bank (ECB) must continue to intervene strongly to maintain orderly conditions in sovereign debt markets. Leaders must stand by their commitments to do whatever it takes to preserve trust in national policies and the euro. Furthermore, given declining inflation pressure and heightened financial and sovereign tensions, the ECB should lower its policy rate if downside risks to growth and inflation persist.

    • The second is that activity in the United States, already softening, might suffer further blows—for example, from a political impasse over fiscal consolidation, a weak housing market, rapid increases in household saving rates, or deteriorating financial conditions. Deep political divisions leave the course of U.S. policy highly uncertain. There is a serious risk that hasty fiscal cutbacks will further weaken the outlook without providing the long-term reforms required to reduce debt to more sustainable levels. News from the housing market has been disappointing, with no end in sight to the overhang of excess supply and declining prices, and equity prices have corrected sharply. These or other developments could prompt households to accelerate their pace of deleveraging, by raising their saving rates further. Given growing downside risks to U.S. activity, the Federal Reserve should stand ready to deploy more unconventional support, and the pace of fiscal consolidation could become more back-loaded provided credible medium-term measures are adopted.

    Either one of these eventualities would have severe repercussions for global growth. The renewed stress could undermine financial markets and institutions in advanced economies, which remain unusually vulnerable. Commodity prices and global trade and capital flows would likely decline abruptly, dragging down growth in emerging and developing economies. The extent to which this could lower global growth is illustrated in more detail in a downside scenario–the euro area and the United States could fall back into recession, with activity some 3 percentage points lower in 2012 than envisaged in WEO projections. Damage to other economies would also be significant.

    Homegrown risks in emerging and developing economies seem less severe. Signs of overheating still warrant close attention, particularly from the monetary and prudential authorities. Risks related to commodity prices and social and political unrest in some parts of the world continue to loom large.

    The uneven nature of the expansion and the many risks that threaten activity are symptomatic of a global economy that continues to struggle to accomplish the two rebalancing acts identified in earlier issues of the World Economic Outlook. First, private demand must take over from public demand. On this front, many economies have made considerable progress, but the major advanced economies lag behind. Second, economies with large external surpluses must rely increasingly on domestic demand, whereas those with large deficits must do the opposite. This rebalancing act has gone only halfway.1 Key advanced and emerging market economies need to strengthen their policies to advance rebalancing and hedge against the many downside risks. Policies must be calibrated to reflect the transformed global environment, including lower potential output in many advanced and crisis-hit emerging market economies, unusually vulnerable financial sectors, high public deficits and debt and more sovereign credit risk differentiation among advanced economies, and the greater economic resilience of many emerging economies.

    Rebalancing from public to private demand: Policymakers in crisis-hit economies must resist the temptation to rely mainly on accommodative monetary policy to mend balance sheets and accelerate repair and reform of the financial sector. Fiscal policy must navigate between the twin perils of losing credibility and undercutting recovery. Fiscal adjustment has already started, and progress has been significant in many economies. Strengthening medium-term fiscal plans and implementing entitlement reforms are critical to ensuring credibility and fiscal sustainability and to creating policy room to support balance sheet repair, growth, and job creation. Better short-term real sector prospects, in turn, would help make medium-term adjustment plans more credible. Should the macroeconomic environment deteriorate substantially, countries with more room for fiscal policy maneuvering should allow automatic stabilizers to operate fully and could choose a more back-loaded adjustment profile.

    • In the euro area, the adverse feedback loop between weak sovereign and financial institutions needs to be broken. Fragile financial institutions must be asked to raise more capital, preferably through private solutions. If these are not available, they will have to accept injections of public capital or support from the EFSF, or be restructured or closed. Medium-term plans for fiscal consolidation are appropriately ambitious. In the economies of the periphery, a major task will be to find the right balance between fiscal consolidation and structural reform on the one hand and external support on the other, so as to ensure that adjustment in these economies can be sustained.

    • The top priorities in the United States include devising a medium-term fiscal consolidation plan to put public debt on a sustainable path and to implement policies to sustain the recovery, including by easing the adjustment in the housing and labor markets. The American Job Act would provide needed short-term support to the economy, but it must be flanked with a strong medium-term fiscal plan that raises revenues and contains the growth of entitlement spending.

    • In Japan, the government should pursue more ambitious measures to deal with the very high level of public debt while attending to the immediate need for reconstruction and development in the areas hit by the earthquake and tsunami.

    In all these economies, major progress with respect to entitlement and tax reform would create more room to adapt the pace of near-term fiscal consolidation to the strength of domestic demand and thereby limit further weakening of the recovery.

    Rebalancing from external to domestic demand: Progress on this front has become even more important to sustain global growth. Some emerging market economies are contributing more domestic demand than is desirable (for example, several economies in Latin America); others are not contributing enough (for example, key economies in emerging Asia). The first set needs to restrain strong domestic demand by considerably reducing structural fiscal deficits and, in some cases, by further removing monetary accommodation. The second set of economies needs significant currency appreciation alongside structural reforms to reduce high surpluses of savings over investment. Such policies would help improve their resilience to shocks originating in the advanced economies as well as their medium-term growth potential.

    The Great Recession amplified a number of real-sector problems, especially in advanced economies. The United States could be facing a very sluggish recovery of employment. Although unemployment is below post—World War II highs, job losses during the crisis were unprecedented and came on top of lackluster employment performance during the preceding decade. Households are more worried about future income prospects than at any time since the early 1980s. Priorities include easing adjustment in the housing market and strengthening active labor market policies. In many ways, however, the problem is so large that it warrants a drastic change in macroeconomic policy: major entitlement and tax reform with a view to creating more room for fiscal policy to sustain the recovery in the short term. In the euro area, abstracting from the large problems posed by the financial turbulence, the situation is more mixed. Households generally seem less concerned than in the United States, and job destruction has been much less severe, except in the crisis-hit economies of the periphery. The key structural challenge is for the economies in the periphery to adopt reforms that improve their capacity to rebuild and maintain their competitiveness.

    Structural challenges elsewhere in the world vary widely. Large capital inflows in some emerging market economies underscore the need to improve their absorptive capacity by further opening product and services markets to foreign capital and strengthening financial stability frameworks. In addition, high food prices underscore the need for many emerging and developing economies to develop well-targeted social safety nets.

    In view of the slow pace of global demand rebalancing, high commodity prices, and the modest growth outlook for advanced economies, long-term interest rates for key sovereigns are likely to stay low. This may foster risk taking in other economies—previous episodes of money recycling on a massive scale have rarely been without financial accidents. Symptoms of excessive risk taking are in fact evident in a few advanced and a number of emerging market economies: very high credit growth, booming real estate markets, and large flows into financial markets. More generally, the financial crisis brought to the fore the extraordinary vulnerability of the global financial system to disruptions in wholesale funding markets. At the national level, central banks have responded by putting in place temporary mechanisms that inject liquidity if wholesale funding threatens to dry up. There are, however, no such mechanisms at the international level. In general, the latest financial crisis illustrates the urgent need to beef up the size and scope of international risk-sharing mechanisms, which have fallen far behind the size of international financial markets.

    To ensure that trade remains supportive of the global recovery, policymakers must continue to resist protectionist pressures. Just as important, with negotiations on the long-running World Trade Organization (WTO) Doha Round of trade talks at a pivotal juncture, political leaders need to muster the will and high-level attention to devise a credible plan to move the negotiations forward, including by strongly communicating the benefits to the public. Failure of the round could lead to fragmentation of the global trading system and a weakening of the WTO and multilateralism.

    Unless policies are strengthened, especially in advanced economies, nothing beyond a weak and bumpy recovery is in the cards. There are potential major benefits to a stronger, collaborative policy response. As explained in a separate IMF report for the G20 Mutual Assessment Program, adopting growth-friendly medium-term fiscal consolidation programs in advanced economies, policies to rebalance demand in emerging market surplus economies, and structural reforms to boost potential growth everywhere could provide a considerable fillip to global GDP.2 Perhaps even more important, together with measures to facilitate balance sheet adjustment by households and banks, such policies would forestall a lost decade of growth in advanced economies, which would be very detrimental for all. However, achieving this will require that policymakers tackle difficult political economy challenges at home and resuscitate the strong collaborative spirit that prevailed at the height of the crisis.

    See Blanchard, Oliver, and Gian Maria Milesi-Ferretti, 2011, “(Why) Should Current Account Balances Be Reduced?” IMF Staff Discussion Note No. 11/03 (Washington: International Monetary Fund); and Lane, Philip, and Gian Maria Milesi-Ferretti, 2011, “External Adjustment and the Global Crisis,” IMF Working Paper No. 11/197 (Washington: International Monetary Fund), for further discussion of this challenge.

    See Group of Twenty, 2010, “G20 Mutual Assessment Process—Alternative Policy Scenarios,” report prepared by staff of the International Monetary Fund for the G20 Mutual Assessment Process, G-20 Toronto Summit, Toronto, Canada, June 26–27 (Washington: International Monetary Fund).

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