World Economic Outlook, October 2014 : Legacies, Clouds, Uncertainties

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Front Matter

International Monetary Fund. Research Dept.
Published Date:
October 2014
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    World Economic and Financial Surveys


    October 2014

    Legacies, Clouds, Uncertainties

    ©2014 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) 0256–6877

    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.


    ISBN 978-1-49833-1-555 (paper)

    978-1-48438-0-666 (PDF)

    978-1-49830-7-901 (ePub)

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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 25, 2014. 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. 2014. World Economic Outlook: Legacies, Clouds, Uncertainties. Washington (October).

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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 30–August 27, 2014, 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 $102.76 a barrel in 2014 and $99.36 a barrel in 2015 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 2014 and 0.7 percent in 2015; that the three-month euro deposit rate will average 0.2 percent in 2014 and 0.1 percent in 2015; and that the six-month Japanese yen deposit rate will yield on average 0.2 percent in 2014 and 2015. 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 19, 2014.

    The following conventions are used throughout the WEO:

    . . . to indicate that data are not available or not applicable;

    – between years or months (for example, 2013–14 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

    / between years or months (for example, 2013/14) 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 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 2013 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.

    The WEO has adopted the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6). Notable changes include the following: (1) Merchanting has been reclassified from services to exports of goods. (2) Manufacturing services on physical inputs owned by others (goods for processing in the BPM5) and maintenance and repair services (repairs on goods in the BPM5) have been reclassified from goods to services. (3) Migrants’ transfers have been removed from capital transfers in the capital account because a change in ownership is no longer imputed. (4) Reverse investment in direct investment has been reclassified so as to present assets and liabilities on a gross basis. (5) A separate financial derivatives category is now included in the financial account, whereas previously it was a subitem under portfolio investment. In addition, the conventional sign for increases in assets (and liabilities) within the financial account is now positive, and balances are now computed as net acquisition of financial assets minus net incurrence of financial liabilities.

    With the adoption of the BPM6, the Statistical Appendix tables of the WEO have also been revised. Table A13, which previously summarized data on net and private financial flows in emerging market and developing economies, is now a Summary of Financial Account Balances. Table A14 has been deleted because of data constraints. Table A15, Summary of Sources and Uses of World Savings, is now A14, Summary of Net Lending and Borrowing, and Table A16 has been renumbered as A15. Part B of the Statistical Appendix contains most of the same tables as previous WEO reports. Tables B16–B21 have been absorbed into a new Table B15, Summary of Current Account Transactions, and into A13, Summary of Financial Account Balances. As a result, the subsequent tables have been renumbered, so that the former Tables B22 through B27 are now Tables B16 through B21.

    Following the recent release of the 2011 International Comparison Program (ICP) survey for new purchasing-power-parity benchmarks, the WEO’s estimates of purchasing-power-parity weights and GDP valued at purchasing power parity have been updated. For more detail, see “Revised Purchasing Power Parity Weights” in the July 2014 WEO Update (

    As in the April 2014 WEO, data for Syria are excluded from 2011 onward because of the uncertain political situation.

    Because of the ongoing IMF program with Pakistan, the series from which the nominal exchange rate assumptions can be calculated are not made public, as the nominal exchange rate is a market-sensitive issue in Pakistan.

    As in the April 2014 WEO, the consumer price projections for Argentina are excluded because of a structural break in the data. Please refer to note 5 in Table A7 of the Statistical Appendix for further details.

    Data for Latvia, which were previously excluded from the euro area aggregates because of data constraints, are now included.

    Projections for Ukraine, which were previously excluded because of the crisis, are once again included.

    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 ( 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 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, 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

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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 Gian Maria Milesi-Ferretti, Deputy Director, Research Department, and Thomas Helbling, Division Chief, Research Department.

    The primary contributors to this report were Abdul Abiad, Aseel Almansour, Aqib Aslam, Samya Beidas-Strom, Rupa Duttagupta, Davide Furceri, Carlos Mulas Granados, Marco E. Terrones, Petia Topalova, and Juan Yépez Albornoz.

    Other contributors include Celine Allard, Rabah Arezki, Angana Banerji, Alberto Behar, Sami Ben Naceur, Marcos de Carvalho Chamon, Rob Dippelsman, Thiemo Fetzer, Harald Finger, Atish R. Ghosh, Roberto Fernandes Guimaraes-Filho, Keiko Honjo, Amr Hosny, Benjamin Hunt, Deniz O. Igan, Gary Jones, Heedon Kang, Joong Shik Kang, Vladimir Klyuev, Mika Kortelainen, Prakash Loungani, Lusine Lusinyan, Troy Matheson, Akito Matsumoto, Andre Meier, Pritha Mitra, Marco Pani, Jiri Podpiera, Jesmin Rahman, Ikuo Saito, Bahrom Shukurov, Juan Sole, Emil Stavrev, Shane Streifel, Yan Sun, Natalia Tamirisa, Florina Tanase, Juan Treviño, Sebastian Weber, SeokHyun Yoon, and Felipe Zanna.

    Gohar Abajyan, Hites Ahir, Gavin Asdorian, Angela Espiritu, Madelyn Estrada, Chanpheng Fizzarotti, Mitko Grigorov, Gregory Hadjian, Cleary A. Haines, Brian Hiland, Ava Yeabin Hong, Hao Jiang, Sinem Kilic Celik, Genevieve Mendiola Lindow, Yun Liu, Olivia Ma, Daniel Rivera Greenwood, Marina Rousset, Tiberiu Scutaru, Xiaobo Shao, Min Song, Rachel Szymanski, Hong Yang, and Jeremy Zook provided research assistance. Atish R. Ghosh provided guidance and suggestions. Mahnaz Hemmati, Toh Kuan, Emory Oakes, and Richard Watson provided technical support. Alimata Kini Kabore and Anduriña Espinoza-Wasil were responsible for word processing. Michael Harrup from the Communications Department led the editorial team and managed production of the publication, with assistance from Lucy Scott Morales, Sherrie Brown, Gregg Forte, and Linda Long and input from Linda Griffin Kean. The Core Data Management team from the IMF’s IT 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 25, 2014. 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 is in the middle of a balancing act. On the one hand, countries must address the legacies of the global financial crisis, ranging from debt overhangs to high unemployment. On the other, they face a cloudy future. Potential growth rates are being revised downward, and these worsened prospects are in turn affecting confidence, demand, and growth today.

    The interplay of these two forces—the crisis legacies proving tougher to resolve than expected and potential growth turning lower—has resulted in several downward revisions to the forecast during the past three years. The forecast in this edition of the World Economic Outlook is, unfortunately, no exception. World growth is mediocre and a bit worse than forecast in July. At the same time, because these two forces operate to different degrees in various countries, the evolution of the global economy has become more differentiated.

    Among advanced economies, the United States and the United Kingdom in particular are leaving the crisis behind and achieving decent growth—though even for those two countries, potential growth is now lower than in the early 2000s. Japan is growing, but high public debt inherited from the past and very low potential growth create major macroeconomic and fiscal challenges. Growth nearly stalled earlier this year in the euro area, even in the core. Although this partly reflects temporary factors, the recovery has been slowed by the crisis legacies, primarily in the south, and by low potential growth nearly everywhere.

    In emerging market economies, lower potential growth is the dominating factor. For these economies as a whole, potential growth is now forecast to be 1.5 percent lower than in 2011. Here again, differentiation is the rule. China is sustaining high growth, but slightly lower growth in the future is seen to be a healthy development. India has recovered from its relative slump; thanks in part to effective policies and a renewal of confidence, growth is expected once again to exceed 5 percent. In contrast, uncertain investment prospects in Russia had already lowered growth before the Ukraine crisis, and the crisis has made growth prospects worse. Uncertain prospects and low investment are also weighing on growth in Brazil.

    The downside risks are clear.

    First, the long period of low interest rates has led to some search for yield, and financial markets may be too complacent about the future. These risks should not be overplayed, but policymakers clearly must be on the lookout. Macroprudential tools are the right instruments to mitigate these risks; whether they are up to the task, however, is an open question.

    Second, geopolitical risks have become more relevant. So far, the effects of the Ukraine crisis have not spread beyond the affected countries and their immediate neighbors. And the turmoil in the Middle East has not had much effect on the level or volatility of energy prices. But clearly, this could change in the future, with major implications for the world economy.

    Third, there is a risk that the recovery in the euro area could stall, that demand could weaken further, and that low inflation could turn into deflation. This is not our baseline, because we believe euro area fundamentals are slowly improving. But should such a scenario play out, it would be the major issue confronting the world economy.

    This takes me to the policy implications.

    In advanced economies, policies must deal with both the crisis legacies and low potential growth. A major focus has been on improving bank balance sheets, but debt overhang of firms and households remains a serious legacy issue in a number of countries. To increase potential growth, as long as demand remains weak, monetary accommodation and low interest rates remain of the essence.

    The weak recovery in the euro area has triggered a new debate about the stance of fiscal policy. The low spreads on sovereign bonds suggest that the fiscal consolidation undertaken during the past few years has built trust among financial investors that current fiscal paths are sustainable. This credibility, which has been acquired at a high price, should not be threatened. This does not imply that there is no scope to use fiscal policy to help sustain the recovery. As we argue in Chapter 3, infrastructure investment, for example, even when financed by debt, may be justified and can help spur demand in the short term and supply in the medium term. And should the recovery stall, being ready to do more would be important.

    Increasing potential output, let alone potential growth, is a tall order, and expectations should remain realistic. In most countries, specific structural reforms can help, however. The challenge, for both advanced and emerging market economies, is to go beyond the general mantra of “undertaking structural reforms” to identify both the reforms that are most needed and the reforms that are politically feasible. Perhaps more generally, the challenge for policymakers is to reestablish confidence by articulating a clear plan to deal with both the legacies of the crisis and the challenges of low potential growth.

    Olivier Blanchard

    Economic Counsellor

    Executive Summary

    Despite setbacks, an uneven global recovery continues. Largely due to weaker-than-expected global activity in the first half of 2014, the growth forecast for the world economy has been revised downward to 3.3 percent for this year, 0.4 percentage point lower than in the April 2014 World Economic Outlook (WEO). The global growth projection for 2015 was lowered to 3.8 percent.

    Downside risks have increased since the spring. Short-term risks include a worsening of geopolitical tensions and a reversal of recent risk spread and volatility compression in financial markets. Medium-term risks include stagnation and low potential growth in advanced economies and a decline in potential growth in emerging markets.

    Given these increased risks, raising actual and potential growth must remain a priority. In advanced economies, this will require continued support from monetary policy and fiscal adjustment attuned in pace and composition to supporting both the recovery and long-term growth. In a number of economies, an increase in public infrastructure investment can also provide support to demand in the short term and help boost potential output in the medium term. In emerging markets, the scope for macroeconomic policies to support growth if needed varies across countries and regions, but space is limited in countries with external vulnerabilities. And in advanced economies as well as emerging market and developing economies, there is a general, urgent need for structural reforms to strengthen growth potential or make growth more sustainable.

    Despite further setbacks this year, an uneven global recovery continues. In advanced economies, the legacies of the precrisis boom and the subsequent crisis (including high private and public debt) still cast a shadow on the recovery. Emerging markets are adjusting to rates of economic growth lower than those reached in the precrisis boom and the postcrisis recovery. Overall, the pace of recovery is becoming more country specific.

    Other elements are also affecting the outlook. Financial markets have been optimistic, with high equity prices, compressed spreads, and very low volatility. However, this has not translated into a pickup in investment, which—particularly in advanced economies—has remained subdued. And as discussed in the October 2014 Global Financial Stability Report, there are concerns that markets are underpricing risk, not fully internalizing the uncertainties surrounding the macroeconomic outlook and their implications for the pace of withdrawal of monetary stimulus in some major advanced economies. Geopolitical tensions have risen. So far their macroeconomic effects appear mostly confined to the regions involved, but there are tangible risks of more widespread disruptions. Some medium-term problems that predate the crisis, such as the impact of an aging population on the labor force and weak growth in total factor productivity, are coming back to the fore and need to be tackled. These problems show up in low potential growth in advanced economies—which may be affecting the pace of recovery today—and a decline in potential growth in emerging markets. Structural reforms to boost potential growth are needed in both.

    Turning to the specifics of the outlook, global growth in the first half of 2014 did slow more than expected at the time of the April 2014 WEO. The weaker-than-expected growth reflects events in the United States, the euro area, Japan, and some large emerging market economies. In the United States, after a surprisingly dismal first quarter, activity picked up in the second quarter, and the evidence suggests that the weakness was mostly temporary. In the euro area, growth came to a halt in the second quarter, mainly on account of weak investment and exports, and uncertainty about the persistence of the growth slowdown remains. In Japan, the decline in domestic demand following the increase in the consumption tax was larger than expected. In Russia and the Commonwealth of Independent States, the weakness reflects the impact of geopolitical tensions on foreign investment, domestic production, and confidence. Lackluster domestic demand in other emerging market economies has once again proven to be more persistent than forecast—particularly in Latin America, with a contraction of GDP in Brazil and negative surprises to activity in several other countries. In China, after a weaker-than-expected first quarter, policy measures supported stronger growth in the second. Overall, weaker-than-expected growth in some emerging markets during the first half of the year may be related to the tightening of financial conditions during the first quarter, but not generally to the slowdown in the United States, given that U.S. imports have grown at a robust pace.

    The forecast envisages a rebound in growth for both advanced economies and emerging markets in the remainder of 2014 and in 2015, but at a rate that for both years is below the April 2014 WEO projections. Specifically, the global growth projection for 2014 has been marked down to 3.3 percent, 0.4 percentage point below that in April, reflecting both the legacy of the weak first half of the year, particularly in the United States, and a less optimistic outlook for several emerging markets. The projection for 2015 has been marked down modestly to 3.8 percent. These projections of a growth rebound are predicated on the assumption that key drivers supporting the recovery in advanced economies identified in the April 2014 WEO remain in place, notably a moderating of fiscal consolidation (Japan being one exception) and the continuation of highly accommodative monetary policy. They also assume a gradual decline in geopolitical tensions. Among advanced economies, the more rapid recovery reflects primarily faster growth in the United States, but also a pickup in activity in the euro area. For emerging markets, the rebound reflects a variety of country-specific as well as global factors. The former include some recovery in countries affected by geopolitical tensions and/or domestic strife in 2014, or where growth this year has been much below potential, and in other countries the gradual lifting of structural impediments to growth. Global factors—easy global financial conditions and the increase in external demand from advanced economies—should also support the pickup in emerging market growth. These global factors are also expected to support growth in low-income developing countries, which is projected to exceed 6 percent in both 2014 and 2015—although the projected easing in nonfuel commodity prices will induce some deterioration in the terms of trade for net exporters of commodities.

    Downside risks have increased since the spring. Increased geopolitical tensions could prove persistent, hampering recovery in the countries directly involved and taking a toll on confidence elsewhere. And a worsening of such tensions could lead to sharply higher oil prices, asset price declines, and further economic distress. Financial market risks include a reversal of recent risk spread and volatility compression triggered by a larger-than-expected increase in U.S. long-term rates—which would also tighten financial conditions for emerging markets. Secular stagnation and low potential growth in advanced economies remain important medium-term risks, given the modest and uneven growth in those economies despite very low interest rates and the easing of other brakes to the recovery. In some major emerging market economies, the negative growth effects of supply-side constraints could be more protracted.

    The pace of the global recovery has disappointed in recent years. With weaker-than-expected global growth for the first half of 2014 and increased downside risks, the projected pickup in growth may again fail to materialize or fall short of expectations. This further underscores that in most economies, raising actual and potential growth must remain a priority. Robust demand growth in advanced economies has not yet emerged despite continued very low interest rates and easing of brakes to the recovery, including from fiscal consolidation or tight financial conditions. Avoiding premature monetary policy normalization remains a priority, as does fiscal adjustment attuned in pace and composition to supporting both the recovery and long-term growth. In this context, an increase in public infrastructure investment, particularly for advanced economies with clearly identified infrastructure needs and efficient public investment processes, could provide a boost to demand in the short term and help raise potential output in the medium term. And structural reforms to raise potential output are of the essence. In emerging markets, the scope for macroeconomic policies to support growth if needed varies across countries and regions, but space is limited in countries with external vulnerabilities. And here as well, there is a general, urgent need for country-specific structural reforms to strengthen growth potential or make growth more sustainable.

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