World Economic Outlook, October 2013 : Transition and Tensions

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International Monetary Fund. Research Dept.
Published Date:
October 2013
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    World Economic and Financial Surveys


    October 2013

    Transitions and Tensions

    International Monetary Fund

    ©2013 International Monetary Fund

    Cover and Design: Luisa Menjivar and Jorge Salazar

    Composition: Maryland Composition

    Cataloging-in-Publication Data

    Joint Bank-Fund Library

    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–

    ISSN (print) 0256–6899

    ISSN (online) 1564–5215

    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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    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 29–August 26, 2013, 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 $104.49 a barrel in 2013 and $101.35 a barrel in 2014 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 2013 and 0.6 percent in 2014; that the three-month euro deposit rate will average 0.2 percent in 2013 and 0.5 percent in 2014; and that the six-month Japanese yen deposit rate will yield on average 0.2 percent in 2013 and 0.3 percent in 2014. 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 23, 2013.

    The following conventions are used throughout the WEO:

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

    • – between years or months (for example, 2012–13 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

    • / between years or months (for example, 2012/13) 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).

    For some countries, the figures for 2012 and earlier are based on estimates rather than actual outturns.

    Data refer to calendar years, except for a few countries that use fiscal years. Please refer to Table F in the Statistical Appendix, which lists the reference periods for each country.

    On July 31, 2013, the U.S. Bureau of Economic Analysis released the Comprehensive Revision of the National Income and Product Accounts (NIPA). The revision includes improvements in methodology and data sources as well as significant changes in definitions and classifications. With this update, the accounts more accurately portray the evolution of the economy. Most notably, expenditures on research and development activities and for the creation of entertainment, literary, and artistic originals are now treated as capital expenditures. Furthermore, the treatment of defined-benefit pension plans is switched from a cash basis to an accrual basis. The revisions increase the level of GDP by 3.4 percent and boost the personal savings rate. The revised data also show that the Great Recession was shallower and the recovery was stronger through the first half of 2012, but also that cyclical weakness was greater during the past year. Overall, the revision does not significantly change the IMF staff’s broad view on the U.S. economic outlook.

    Starting with the July 2013 WEO Update, India’s data and forecasts are presented on a fiscal year basis.

    On July 1, 2013, Croatia became the 28th member state of the European Union.

    Projections for Cyprus, which were excluded from the April 2013 WEO due to the crisis, are once again included.

    As in the April 2013 WEO, data for Syria are excluded for 2011 onward due to the uncertain political situation.

    Data for Palau are now included in the Developing Asia region.

    Iran’s real GDP growth for 2012 and beyond has not been significantly updated from the April 2013 WEO in light of the pending publication of national accounts by the central bank and the new authorities’ plans.

    Zambia redenominated its currency by replacing 1,000 old Zambian kwacha notes with 1 new Zambian kwacha note. Local currency data for Zambia are expressed in the new currency starting with the October 2013 WEO database.

    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. Some territorial entities included here are not states, although their 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.

    Further Information and Data

    This version of the World Economic Outlook (WEO) is available in full through the IMF eLibrary ( and the IMF website ( 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 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. Corrections and revisions made after publication are incorporated into the electronic editions available from the IMF eLibrary ( and on the IMF website ( 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,

    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):

    World Economic Studies Division

    Research Department

    International Monetary Fund

    700 19th Street, N.W.

    Washington, DC 20431, U.S.A.

    Fax: (202) 623-6343

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    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 Jörg Decressin, Deputy Director, Research Department, and by Thomas Helbling, Division Chief, Research Department.

    The primary contributors to this report are Abdul Abiad, Jaromir Benes, John Bluedorn, Rupa Duttagupta, Davide Furceri, Jaime Guajardo, Sebnem Kalemli-Ozcan, Andrea Pescatori, Damiano Sandri, and John Simon.

    Other contributors include Gustavo Adler, Hites Ahir, Daniel Ahn, Michal Andrl, Rabah Arezki, Bas Bakker, Angana Banerji, Alberto Behar, Samya Beidas-Strom, Patrick Blagrave, Dennis Botman, Kevin Cheng, Alfredo Cuevas, Romain Duval, Joshua Felman, Harald Finger, Roberto Garcia-Saltos, Ferdinand Heinz, Keiko Honjo, Benjamin Hunt, Dora Iakova, Zoltan Jakab, Joong Shik Kang, Michael Kumhof, René Lalonde, Douglas Laxton, Shuda Li, Prakash Loungani, Lusine Lusinyan, Junior Maih, Pritha Mitra, Dirk Muir, Sami Ben Naceur, Marco Pani, Marina Rousset, Jay Shambaugh, Serhat Solmaz, Shane Streifel, Yan Sun, Natalia Tamirisa, Thierry Tressel, Jarko Turunen, and Shengzu Wang.

    Gavin Asdorian, Shan Chen, Tingyun Chen, Angela Espiritu, Sinem Kilic Celik, Mitko Grigorov, Nadezhda Lepeshko, Katherine Pan, Daniel Rivera Greenwood, Bennet Voorhees, and Fan Zhang provided research assistance. Kevin Clinton, Olivier Coibion, Christopher Erceg, Martin Kaufman, Anton Korinek, Andrew Levin, Akito Matsumoto, and Silvia Sgherri, provided comments and suggestions. Mahnaz Hemmati, Toh Kuan, Emory Oakes, and Richard Watson provided technical support. Alimata Kini Kaboré and Anduriña Espinoza-Wasil were responsible for word processing. Linda Griffin Kean of the Communications Department edited the manuscript and coordinated production of the publication with assistance from Joe Procopio, Lucy Scott Morales, and Linda Long. The Core Data Management team from the IMF’s Technology and General Services Department, and external consultant 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 September 23, 2013. 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.


    The world economy has entered yet another transition. Advanced economies are gradually strengthening. At the same time, growth in emerging market economies has slowed. This confluence is leading to tensions, with emerging market economies facing the dual challenges of slowing growth and tighter global financial conditions.

    The U.S. economy remains at the center of events. Private demand continues to be strong, although growth has been hobbled this year by excessive fiscal consolidation. Politics is creating uncertainty about both the nature and the strength of the fiscal adjustment. The sequester is a bad way to consolidate, and conflicts around increasing the debt ceiling could lead to another bout of destabilizing uncertainty and lower growth. Nevertheless, it is time for monetary policy to make plans for an exit from both quantitative easing and zero policy rates. While there are no major conceptual or technical issues involved, the communication problems facing the Federal Reserve are new and delicate. It is reasonable to expect some volatility in long rates as Fed policy shifts.

    The recovery in Japan has been spurred by Abenomics, but sustaining it will depend on meeting two major challenges. The first, reflected in the debate about increasing the consumption tax, is setting the right pace for fiscal consolidation: consolidating too slowly will compromise credibility, and moving too fast will kill growth. The second is implementing a credible set of structural reforms to transform what is now a cyclical recovery into sustained growth.

    The core economies of Europe show some signs of recovery. This is the result not of recent major policy changes but of a change in mood, which nonetheless could be largely self-fulfilling if consumers and firms decide to increase spending. Southern periphery countries are still struggling, however. Progress on improving competitiveness and increasing exports is not yet strong enough to offset depressed internal demand. In both the core and the periphery, there is lingering uncertainty about bank balance sheets, which should be reduced by the promised review of banks’ asset quality. Taking the longer view, just as for Japan, structural reforms are urgently needed to invigorate the anemic potential growth rates that plague the region.

    The major news at this time comes from emerging market economies, where growth has declined—often by more than we previously forecast.

    The obvious question is whether this slowdown reflects cyclical factors or a decrease in potential output growth. Based on what we know today, the answer is that it reflects both, albeit to different degrees in various countries—more cyclical in Russia and South Africa, more decreased potential in China and India. Unusually favorable world conditions, including high commodity prices and rapid financial market development, increased potential growth in these economies during the 2000s, and in a number of them, there was a cyclical component on top. As commodity prices stabilize and financial conditions tighten, potential growth is lower, leading in some cases to a sharp cyclical adjustment.

    Confronted with these changing conditions, governments in emerging market economies face two challenges. The first is to adjust to lower potential growth. While some decrease in growth relative to the 2000s is inevitable, structural reforms can help ease the adjustment and are becoming more urgent. The list is a familiar one, from rebalancing toward consumption in China to removing barriers to investment in Brazil and India. The second challenge is to deal with the cyclical adjustment, and here the standard advice also applies. Countries with large fiscal deficits must consolidate. Countries with inflation running persistently above target must tighten and—often more important—put in place a more credible monetary policy framework.

    The potential impact on these economies of an increase in U.S. long rates makes this advice even more relevant. Normalization of interest rates in advanced economies is likely to lead to a partial reversal of previous capital flows. As investors repatriate funds to the United States, countries with weaker fiscal positions or higher inflation are particularly exposed. The right response is twofold. First, where needed, countries must put their macro houses in order by clarifying their monetary policy framework and maintaining fiscal sustainability. Second, they must let the exchange rate depreciate in response to outflows. Foreign currency exposure and balance-sheet effects, which have created adverse effects in the past, are more limited today, and emerging market economies should be able to adjust to the changed environment without a major crisis.

    In short, the recovery from the crisis continues, albeit too slowly. The focus at this time is on emerging market economies—specifically, on the combination of slower growth and tighter financial conditions triggered by U.S. monetary policy. But, in the background, other legacies of the crisis still linger and may well come back to the fore. Public debt and, in some cases, private debt remain very high, and fiscal sustainability is not a given. The architecture of the financial system is evolving, and its future shape is still unclear. These issues will continue to shape the evolution of the world economy for many years to come.

    Olivier Blanchard

    Economic Counsellor

    Executive Summary

    Global growth is in low gear, the drivers of activity are changing, and downside risks persist. China and a growing number of emerging market economies are coming off cyclical peaks. Their growth rates are projected to remain much above those of the advanced economies but below the elevated levels seen in recent years, for both cyclical and structural reasons. The United States has seen several quarters of solid private demand. Although public sector demand has been pushing in the opposite direction, this counterforce will diminish in 2014, setting the stage for higher growth. Japan’s economy is enjoying a vigorous rebound but will lose steam in 2014 as fiscal policy tightens. The euro area is crawling out of recession, but activity is forecast to stay tepid. In these three advanced economies, much slack remains and inflation pressure is expected to stay subdued.

    These changing growth dynamics raise new policy challenges, and policy spillovers may pose greater concern. Two recent developments will likely shape the path of the global economy in the near term. First, markets are increasingly convinced that U.S. monetary policy is reaching a turning point. Talk by the Federal Reserve about tapering its quantitative easing measures led to an unexpectedly large increase in long-term yields in the United States and many other economies, much of which has not been reversed despite a subsequent decision by the Federal Reserve to maintain the amount of asset purchases and policy actions in other countries. Second, there is strengthening conviction that China will grow more slowly over the medium term than in the recent past—previous expectations that the Chinese authorities would react with a strong stimulus if output growth were to decline toward the government target of 7½ percent have had to be revised.

    The October 2013 Global Financial Stability Report (GFSR) explains how spillovers from these changed perceptions have already provided a sort of mini stress test for financial systems. In emerging markets, the spillovers interacted with existing vulnerabilities and triggered both desirable and undesirable adjustments. The desirable adjustments feature reallocated capital flows and currency depreciations that help attenuate growing competitiveness problems: typically, the currencies that depreciated most were those that the 2013 Pilot External Sector Report had assessed as overvalued. At the same time, however, volatility has gone up, and the risk of overshooting could weigh on investment and growth.

    Looking ahead, global activity is expected to strengthen moderately but the risks to the forecast remain to the downside. The impulse is projected to come from the advanced economies, where output is expected to expand at a pace of about 2 percent in 2014, about ¾ percentage point more than in 2013. Drivers of the projected uptick are a stronger U.S. economy, an appreciable reduction in fiscal tightening (except in Japan), and highly accommodative monetary conditions. Growth in the euro area will be held back by the very weak economies in the periphery. Emerging market and developing economies are projected to expand by about 5 percent in 2014, as fiscal policy is forecast to stay broadly neutral and real interest rates to remain relatively low. Unemployment will remain unacceptably high in many advanced economies as well as in various emerging market economies, notably those in the Middle East and North Africa.

    Some new downside risks have come to the fore, while old risks largely remain. At the time of writing, a political standoff in the United States has led to a shutdown of its federal government. The projections assume that the shutdown is short, discretionary public spending is approved and executed as assumed in the forecast, and the debt ceiling—which may be reached by mid-October—is raised promptly. There is uncertainty on all three accounts. While the damage to the U.S. economy from a short shutdown is likely to be limited, a longer shutdown could be quite harmful. And, even more importantly, a failure to promptly raise the debt ceiling, leading to a U.S. selective default, could seriously damage the global economy.

    Beyond immediate risks, the October 2013 Global Financial Stability Report underscores that the prospect of reduced monetary accommodation in the United States may cause additional market adjustments and expose areas of financial excess and systemic vulnerability. In this setting, emerging market economies may face exchange rate and financial market overshooting as they also cope with weaker economic outlooks and rising domestic vulnerabilities; some could even face severe balance of payments disruptions. In the euro area, risks continue to flow from the unfinished business of restoring bank health and credit transmission and from corporate debt overhang. Insufficient fiscal consolidation and structural reforms in Japan could trigger serious downside risks, especially of the fiscal variety. In this regard, the October 2013 Fiscal Monitor emphasizes that the large public debt stocks and the absence of medium-term adjustment plans with concrete measures and strong entitlement reforms in key advanced economies, notably Japan and the United States, combine to keep fiscal risks at a stubbornly high level. Fiscal vulnerabilities are also building in emerging market and low-income economies to varying degrees. In the meantime, geopolitical risks have returned.

    Policymakers have shown their determination to keep the global economy away from the precipice. Aside from new cliff events, a growing worry is a prolonged period of sluggish global growth. A plausible downside scenario for the medium term would be characterized by a continuation of only modest growth in the euro area because of persistent financial fragmentation and unexpectedly high legacy effects from private indebtedness, a hobbling of emerging market economies by imbalances and supply-side bottlenecks, and prolonged deflation in Japan. Meanwhile, the end of U.S. quantitative easing could come with a greater and longer-lasting tightening of global financial conditions than is presently expected. As a result, the global economy could grow by only slightly more than 3 percent a year over the medium term, instead of reaccelerating to over 4 percent. What is more worrisome, monetary policy in the advanced economies could be stuck at the zero interest bound for many years. Over time, worrisomely high public debt in all major advanced economies and persistent financial fragmentation in the euro area could then trigger new crises.

    Forestalling the plausible downside scenario or the advent of new crises requires further policy efforts, mainly in the advanced economies. Old challenges to be addressed include repairing financial systems and adopting a banking union in the euro area and developing and implementing strong plans, supported by concrete measures, for medium-term fiscal adjustment and entitlement reform in Japan and the United States. Furthermore, in the euro area and Japan, in particular, there is a need to boost potential output, including through reforms that level the playing field between insiders and outsiders in labor markets and ease barriers to entry into product and services markets. A new challenge is for U.S. monetary policy to change tack carefully in response to changing growth, inflation, and financial stability prospects. Excessive tightening may be difficult to undo, and global growth may well fall short of, rather than exceed, medium-term growth and inflation projections.

    Emerging market and developing economies are facing new policy challenges. The appropriate policy mix and the pace of adjustment will differ across economies, in view of the differences in output gaps, inflation pressure, central bank credibility, room for fiscal policy maneuvering, and the nature of vulnerabilities. However, many economies share five policy priorities. First, policymakers should allow exchange rates to respond to changing fundamentals but may need to guard against risks of disorderly adjustment, including through intervention to smooth excessive volatility. Second, where monetary policy frameworks are less credible, efforts may need to focus more on providing a strong nominal anchor. Third, prudential actions should be taken to safeguard financial stability, given legacy risks from recent credit booms and new risks from capital flows. Fourth, fiscal consolidation should proceed, unless activity threatens to deteriorate very sharply and funding conditions permit fiscal easing—issues discussed in more detail in the October 2013 Fiscal Monitor. Fifth, many economies need a new round of structural reforms, including investment in public infrastructure, removal of barriers to entry in product and services markets, and in the case of China, rebalancing growth away from investment toward consumption.

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