Chapter

World Economic Outlook1

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
November 2013
Share
  • ShareShare
Show Summary Details

Global activity is expected to strengthen moderately over the next two years. 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 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.

Overview of the World Economic Outlook Projections(Percent change)
Year over Year
Projections
201220132014
World output3.22.93.6
Advanced economies1.51.22.0
Of which:United States2.81.62.6
European Union−0.30.01.3
Emerging and developing economies4.94.55.1
Of which:MENAP4.62.33.6
CCA5.85.86.1
Commonwealth of Independent States3.42.13.4
Of which: Russia3.41.53.0
World trade volume (goods and services)2.72.94.9
Commodity prices
Oil11.0−0.5−3.0
Nonfuel2−9.9−1.5−4.2
Sources: IMF, World Economic Outlook (October 2013) and Regional Economic Outlook: Middle East and Central Asia (November 2013).

Simple average of prices of U.K. Brent, Dubai, and West Texas Intermediate crude oil. The average price of oil in U.S. dollars a barrel was $105.01 in 2012; the assumed price based on future markets is $104.49 in 2013 and $101.35 in 2014.

Average (measured in U.S. dollars) based on world commodity export weights.

Sources: IMF, World Economic Outlook (October 2013) and Regional Economic Outlook: Middle East and Central Asia (November 2013).

Simple average of prices of U.K. Brent, Dubai, and West Texas Intermediate crude oil. The average price of oil in U.S. dollars a barrel was $105.01 in 2012; the assumed price based on future markets is $104.49 in 2013 and $101.35 in 2014.

Average (measured in U.S. dollars) based on world commodity export weights.

Risks to this forecast remain to the downside. The prospect of reduced monetary accommodation in the United States may cause additional market adjustments and expose areas of financial excess and systemic vulnerability. Risks to activity also flow from near-term U.S. fiscal policy. 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. Fiscal vulnerabilities are also building in emerging market and low-income economies to varying degrees. In the meantime, geopolitical risks have returned.

Aside from the 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 these risks 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.

In emerging market and developing economies, policy priorities center on exchange rate policy and fiscal and structural reforms. 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. Where monetary policy frameworks are less credible, efforts may need to focus more on providing a strong nominal anchor. Prudential actions should be taken to safeguard financial stability, given legacy risks from recent credit booms and new risks from capital flows. Fiscal consolidation should proceed, unless activity threatens to deteriorate very sharply and funding conditions permit fiscal easing. Many economies need a new round of structural reforms, including investment in public infrastructure and removal of barriers to entry in product and services markets.

See IMF, World Economic Outlook, Global Financial Stability Report, and Fiscal Monitor (all October 2013) for more information.

    Other Resources Citing This Publication