Front Matter

Front Matter

International Monetary Fund. Research Dept.
Published Date:
April 2011
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    World Economic and Financial Surveys


    Tensions from the Two-Speed Recovery Unemployment, Commodities, and Capital Flows International Monetary Fund

    International Monetary Fund

    ©2011 International Monetary Fund

    Production: IMF Multimedia Services Division

    Cover and Design: Luisa Menjivar and Jorge Salazar

    Composition: Maryland Composition

    Cataloging-in-Publication Data

    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.


    ISBN 9781616350598

    Please send orders to:

    International Monetary Fund, Publication Services

    P.O. Box 92780, Washington, D.C. 20090, U.S.A.

    Tel.: (202) 623-7430 Fax: (202) 623-7201




    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 February 8-March 8, 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); that the average price of oil will be $107.16 a barrel in 2011 and $108.00 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 0.6 percent in 2011 and 0.9 percent in 2012; that the three-month euro deposit rate will average 1.7 percent in 2011 and 2.6 percent in 2012; and that the six-month Japanese yen deposit rate will yield on average 0.6 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 late March 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).

    WEO aggregated data excludes Libya for projection years due to the uncertain political situation.

    Except for GDP growth and inflation, projections for Côte d’Ivoire are not shown due to the uncertain political situation.

    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 country group composites for fiscal data are calculated as the sum of the U.S dollar values for the relevant individual countries. This differs from the calculations in the October 2010 and earlier issues of the World Economic Outlook, for which the composites were weighted by GDP valued at purchasing power parities (PPPs) as a share of total world GDP.

    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.

    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

    700 19th Street, N.W.

    Washington, D.C. 20431, U.S.A.

    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 Jörg Decressin, Senior Advisor, Research Department, and Petya Koeva Brooks, Division Chief, Research Department. The primary contributors to this report are Abdul Abiad, John Bluedorn, Rupa Duttagupta, Jaime Guajardo, Thomas Helbling, Joong Shik Kang, Michael Kumhof, Dirk Muir, Andrea Pescatori, Shaun Roache, John Simon, and Petia Topalova. Other contributors include Joshua Felman, Benjamin Hunt, Florence Jaumotte, Mika Kortelainen, Daniel Leigh, Troy Matheson, Stephen Snudden, Marco Terrones, and Robert Tetlow. Kevin Clinton provided comments and suggestions. Toh Kuan, Gavin Asdorian, Shan Chen, Angela Espiritu, Murad Omoev, Andy Salazar, Min Kyu Song, Ercument Tulun, Jessie Yang, Nese Erbil, David Reichsfeld, and Marina Rousset provided research assistance. Saurabh Gupta, Mahnaz Hemmati, Laurent Meister, Emory Oakes, and Steve Zhang managed the database and the computer systems. Tita Gunio, Shanti Karunaratne, 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. Additional technical support was provided by external consultants Vladimir Bougay, Anastasia Francis, Aleksandr Gerasimov, Wendy Mak, Shamiso Mapondera, Nhu Nguyen, and Pavel Pimenov.

    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 March 28, 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.


    The world economic recovery continues, more or less as predicted. Indeed, our growth forecasts are nearly unchanged since the January 2011 WEO Update and can be summarized in three numbers: We expect the world economy to grow at about 4½ percent a year in both 2011 and 2012, but with advanced economies growing at only 2½ percent while emerging and developing economies grow at a much higher 6½ percent.

    Earlier fears of a double-dip recession—which we did not share—have not materialized. The main worry was that in advanced economies, after an initial recovery driven by the inventory cycle and fiscal stimulus, growth would fizzle. The inventory cycle is now largely over and fiscal stimulus has turned to fiscal consolidation, but private demand has, for the most part, taken the baton.

    Fears have turned to commodity prices. Commodity prices have increased more than expected, reflecting a combination of strong demand growth and supply shocks. Although these increases conjure up the specter of 1970s-style stagflation, they appear unlikely to derail the recovery. In advanced economies, the decreasing share of oil, the disappearance of wage indexation, and the anchoring of inflation expectations all combine to suggest there will be only small effects on growth and core inflation. The challenge will be stronger however in emerging and developing economies, where the consumption share of food and fuel is larger and the credibility of monetary policy is often weaker. Inflation may well be higher for some time but, as our forecasts suggest, we do not expect a major adverse effect on growth. However, risks to the recovery from additional disruptions to oil supply are a concern.

    The recovery, however, remains unbalanced.

    In most advanced economies, output is still far below potential. Unemployment is high, and low growth implies that it will remain so for many years to come. The source of low growth can be traced to both precrisis excesses and crisis wounds: In many countries, especially the United States, the housing market is still depressed, leading to anemic housing investment. The crisis itself has led to a dramatic deterioration in fiscal positions, forcing a shift to fiscal consolidation while not eliminating market worries about fiscal sustainability. And in many countries banks are struggling to achieve higher capital ratios in the face of increasing nonperforming loans.

    The problems of the European Union periphery, stemming from the combined interactions of low growth, fiscal woes, and financial pressures, are particularly acute. Reestablishing fiscal and financial sustainability in the face of low or negative growth and high interest rates is a substantial challenge. And, while extreme, the problems of the EU periphery point to a more general problem: an underlying low rate of growth of potential output. Adjustment is very hard when growth is very low.

    The policy advice to advanced economies remains largely the same as in the October 2010 World Economic Outlook, and so far has been only partly heeded: increased clarity on banks’ balance sheet exposures and ready recapitalization plans if needed; smart fiscal consolidation that is neither too fast, which could kill growth, nor too slow, which would kill credibility; the redesign of financial regulation and supervision; and, especially in Europe, an increased focus on reforms to increase potential growth.

    In emerging market economies, by contrast, the crisis left no lasting wounds. Their initial fiscal and financial positions were typically stronger, and the adverse effects of the crisis were more muted. High underlying growth and low interest rates are making fiscal adjustment much easier. Exports have largely recovered, and whatever shortfall in external demand they experienced has typically been made up through increases in domestic demand. Capital outflows have turned into capital inflows, due to both better growth prospects and higher interest rates than in the advanced economies.

    The challenge for most emerging market economies is thus quite different from that of the advanced economies—namely, how to avoid overheating in the face of closing output gaps and higher capital flows. Their response should be twofold: first, to rely on a combination of fiscal consolidation and higher interest rates to maintain output at potential and, second, to use macroprudential tools—including, where needed, capital controls—to avoid increases in systemic risk stemming from inflows. Countries are often tempted to resist the exchange rate appreciation that is likely to come with higher interest rates and higher inflows. But appreciation increases real income, is part of the desirable adjustment, and should not be resisted.

    Overall, the macro policy agenda for the world economy remains the same but, with the passage of time, more urgent. For the recovery to be sustained, advanced economies must achieve fiscal consolidation. To do this and to maintain growth, they need to rely more on external demand. Symmetrically, emerging market economies must rely less on external demand and more on domestic demand. Appreciation of emerging market economies’ currencies relative to those of advanced economies is an important key to this global adjustment. The need for careful design at the national level and coordination at the global level may be as important today as at the peak of the crisis two years ago.

    Olivier Blanchard

    Economic Counsellor


    The recovery is gaining strength, but unemployment remains high in advanced economies, and new macroeconomic risks are building in emerging market economies. In advanced economies, the hand-off from public to private demand is advancing, reducing concerns that diminishing fiscal policy support might cause a “double-dip” recession. Financial conditions continue to improve, although they remain unusually fragile. In many emerging market economies, demand is robust and overheating is a growing policy concern. Developing economies, particularly in sub-Saharan Africa, have also resumed fast and sustainable growth. Rising food and commodity prices pose a threat to poor households, adding to social and economic tensions, notably in the Middle East and North Africa. Oil price increases since January 2011 and information on supply, including on spare capacity, suggest that the disruptions so far would have only mild effects on economic activity. An earthquake in Japan has exacted a terrible human toll. Its macroeconomic impact is projected to be limited, although uncertainty remains elevated. Overall, with the recovery stronger on the one hand but oil supply growth lower on the other, projections for global real GDP growth in 2011–12 are little changed from the January 2011 WEO Update. But downside risks have risen.

    World real GDP growth is forecast to be about 4½ percent in 2011 and 2012, down modestly from 5 percent in 2010. Real GDP in advanced economies and emerging and developing economies is expected to expand by about 2½ percent and 6½ percent, respectively. Downside risks continue to outweigh upside risks. In advanced economies, weak sovereign balance sheets and still-moribund real estate markets continue to present major concerns, especially in certain euro area economies; financial risks are also to the downside as a result of the high funding requirements of banks and sovereigns. New downside risks are building on account of commodity prices, notably for oil, and, relatedly, geopolitical uncertainty, as well as overheating and booming asset markets in emerging market economies. However, there is also the potential for upside surprises to growth in the short term, owing to strong corporate balance sheets in advanced economies and buoyant demand in emerging and developing economies.

    Many old policy challenges remain unaddressed even as new ones come to the fore. In advanced economies, strengthening the recovery will require keeping monetary policy accommodative as long as wage pressures are subdued, inflation expectations are well anchored, and bank credit is sluggish. At the same time, fiscal positions need to be placed on sustainable medium-term paths by implementing fiscal consolidation plans and entitlement reforms supported by stronger fiscal rules and institutions. This need is particularly urgent in the United States to stem the risk of globally destabilizing changes in bond markets. The U.S. policy plans for 2011 have actually switched back from consolidation to expansion. Efforts should be made to reduce the projected deficit for fiscal year 2011. Measures to trim discretionary spending are a move in this direction. However, to make a sizable dent in the projected medium-term deficits, broader measures such as Social Security and tax reforms will be essential. In Japan, the immediate fiscal priority is to support reconstruction. Once reconstruction efforts are under way and the size of the damage is better understood, attention should turn to linking reconstruction spending to a clear fiscal strategy for bringing down the public debt ratio over the medium term. In the euro area, despite significant progress, markets remain apprehensive about the prospects of countries under market pressure. For them what is needed at the euro area level is sufficient, low-cost, and flexible funding to support strong fiscal adjustment, bank restructuring, and reforms to promote competitiveness and growth. More generally, greater trust needs to be reestablished in euro area banks through ambitious stress tests and restructuring and recapitalization programs. Moreover, reform of the global financial system remains very much a work in progress.

    The challenge for many emerging and some developing economies is to ensure that present boom-like conditions do not develop into overheating over the coming year. Inflation pressure is likely to build further as growing production comes up against capacity constraints, with large food and energy price increases, which weigh heavily in consumption baskets, motivating demands for higher wages. Real interest rates are still low and fiscal policies appreciably more accommodative than before the crisis. Appropriate action differs across economies, depending on their cyclical and external conditions. However, a tightening of macroeconomic policies is needed in many emerging market economies.

    • For external surplus economies, many of which manage their currencies and do not face fiscal problems, removal of monetary accommodation and appreciation of the exchange rate are necessary to maintain internal balance—reining in inflation pressure and excessive credit growth—and assist in global demand rebalancing.
    • Many external deficit economies need to tighten fiscal and monetary policies, possibly tolerating some overshooting of the exchange rate in the short term.
    • For some surplus and deficit economies, rapid credit and asset price growth warn of a threat to financial stability. Policymakers in these economies will need to act soon to safeguard stability and build more resilient financial systems.
    • Many emerging and developing economies will need to provide well-targeted support for poor households that struggle with high food prices.

    Capital flows to emerging market economies resumed remarkably quickly after the crisis. However, as policy rates in advanced economies rise from their unusually low levels, volatile flows may again exit the emerging market economies. Depending on country-specific circumstances, and assuming appropriate macroeconomic and prudential policies are in place, measures designed to curb capital inflows can play a role in dampening the impact of their excessive volatility on the real economy. However, such measures are not a substitute for macroeconomic tightening.

    Greater progress in advancing global demand rebalancing is essential to put the recovery on a stronger footing over the medium term. This will require action by many countries, notably fiscal adjustment in key external deficit economies and greater exchange rate flexibility and structural reforms that eliminate distortions that boost savings in key surplus economies.

    There is broad agreement on the contours of the policy responses sketched here. However, with the peak of the crisis now past, the imperative for action and willingness to cooperate among policymakers is diminishing. It would be a mistake for advanced economies to delay fiscal adjustment in the face of a difficult political economy at home. Additionally, while the removal of distortions that boost saving in key external surplus economies would support growth and help achieve fiscal consolidation in key advanced economies, insufficient progress on one front should not serve as an excuse for inaction on the other front. It would also be a mistake for emerging market economies to delay exchange rate adjustment in the face of rising inflation pressure. Many emerging market economies cannot afford to delay additional policy tightening until the advanced economies undertake such tightening themselves. The task facing policymakers is to convince their national constituencies that these policy responses are in their best economic interests, regardless of the actions others are taking.

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