- International Monetary Fund. Research Dept.
- Published Date:
- April 2011
World Economic and Financial Surveys
WORLD ECONOMIC OUTLOOK April 2011
Tensions from the Two-Speed Recovery Unemployment, Commodities, and Capital Flows International Monetary Fund
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World economic outlook (International Monetary Fund)
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- Assumptions and Conventions
- Executive Summary
- Chapter 1. Global Prospects and Policies
- The Recovery Has Solidified, but Unemployment Remains High
- Financial Conditions Are Improving
- Commodity Prices Are Resurgent
- The Recovery Is Expected to Solidify
- Risks Are Smaller but Remain to the Downside
- Differences in the Pace of Activity Present Short-Term Policy Challenges
- Advanced Economies Need to Repair Public and Financial Balance Sheets
- Emerging Market Economies Need to Guard against Overheating and Credit Booms
- Global Demand Rebalancing Is Not Progressing
- Unemployment Needs to Be Reduced
- Policies Are Not Yet Sufficiently Proactive
- Appendix 1.1. Financial Conditions Indices
- Appendix 1.2. Commodity Market Developments and Prospects
- Chapter 2. Country and Regional Perspectives
- Recovery Proceeds in the United States
- A Gradual and Uneven Recovery Is under Way in Europe
- A Moderate Recovery Continues in the Commonwealth of Independent States
- Rapid Growth Continues in Asia
- Latin America Faces Buoyant External Conditions
- Growth Has Returned to Precrisis Rates in Many African Countries
- The Recovery in the Middle East and North Africa Region Faces an Uncertain Environment
- Chapter 3. Oil Scarcity, Growth, and Global Imbalances
- Chapter 4. International Capital Flows: Reliable or Fickle?
- What Are the Main Findings?
- Trends in Net Capital Flows: Size, Composition, Volatility, and Persistence
- Capital Flows and the Global Environment
- Does Direct Financial Exposure Affect the Response of Private Capital Flows to Changes in U.S. Monetary Policy?
- Policy Implications and Conclusions
- Appendix 4.1. Classification of Economies and Data Sources
- Appendix 4.2. Composition, Volatility, and Persistence of Net Private Capital Flows across Emerging Market Regions
- Appendix 4.3. Global Factor Model
- Appendix 4.4. Regression Methodology and Robustness Checks
- Annex: IMF Executive Board Discussion of the Outlook, March 2011
- Statistical Appendix
- What’s New
- Data and Conventions
- Classification of Countries
- General Features and Composition of Groups in the World Economic Outlook Classification
- Table A. Classification by World Economic Outlook Groups and Their Shares in Aggregate GDP, Exports of Goods and Services, and Population, 2009
- Table B. Advanced Economies by Subgroup
- Table C. European Union
- Table D. Emerging and Developing Economies by Region and Main Source of Export Earnings
- Table E. Emerging and Developing Economies by Region, Net External Position, and Status as Heavily Indebted Poor Countries
- Box A1. Economic Policy Assumptions Underlying the Projections for Selected Economies
- List of Tables
- World Economic Outlook, Selected Topics
- Box 1.1. House Price Busts in Advanced Economies: Repercussions for Global Financial Markets
- Box 1.2. World Economic Outlook Downside Scenarios
- Box 1.3. International Spillovers and Macroeconomic Policymaking
- Box 1.4. Did the Plaza Accord Cause Japan’s Lost Decades?
- Box 2.1. Unwinding External Imbalances in the European Union Periphery
- Box 3.1. Life Cycle Constraints on Global Oil Production
- Box 3.2. Unconventional Natural Gas: A Game Changer?
- Box 3.3. Short-Term Effects of Oil Shocks on Economic Activity
- Box A1. Economic Policy Assumptions Underlying the Projections for Selected Economies
- Table 1.1. Overview of the World Economic Outlook Projections
- Table 1.2. Global Oil Demand and Production by Region
- Table 1.3. Consumption of Base Metals
- Table 1.4. Annual Price Changes for Key Commodities
- Table 1.5. Trade Balance Impact of Higher Prices
- Table 1.1.1. Cross-Country Financial Market Synchronization
- Table 2.1. Selected Advanced Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
- Table 2.2. Selected European Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
- Table 2.3. Commonwealth of Independent States: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
- Table 2.4. Selected Asian Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
- Table 2.5. Selected Western Hemisphere Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
- Table 2.6. Selected Sub-Saharan African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
- Table 2.7. Selected Middle East and North African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
- Table 3.1. Oil Demand Price and Income Elasticities
- Table 3.2. Oil Demand Price and Income Elasticities, Including Oil-Exporting Economies
- Table 3.3. Oil Demand Price and Income Elasticities in the Extended Sample
- Table 3.4. Oil Demand Price and Income Short-Term Elasticities: High versus Low Oil Price Environments
- Table 3.2.1. Unconventional Natural Gas Resources, 2009
- Table 3.2.2. Composition of Wholesale Gas Transactions: United States and Europe, 2007
- Table 3.3.1. Annualized Percent Impact of a 10 Percent Oil Price Increase on Real U.S. GDP Growth after One Year
- Table 4.1. Economy Groupings
- Table 4.2. Data Sources
- Table 4.3. Baseline Results
- Table 4.4. U.S. Direct Financial Exposure Weight
- Table A1. Summary of World Output
- Table A2. Advanced Economies: Real GDP and Total Domestic Demand
- Table A3. Advanced Economies: Components of Real GDP
- Table A4. Emerging and Developing Economies: Real GDP
- Table A5. Summary of Inflation
- Table A6. Advanced Economies: Consumer Prices
- Table A7. Emerging and Developing Economies: Consumer Prices
- Table A8. Major Advanced Economies: General Government Fiscal Balances and Debt
- Table A9. Summary of World Trade Volumes and Prices
- Table A10. Summary of Balances on Current Account
- Table A11. Advanced Economies: Balance on Current Account
- Table A12. Emerging and Developing Economies: Balance on Current Account
- Table A13. Emerging and Developing Economies: Net Financial Flows
- Table A14. Emerging and Developing Economies: Private Financial Flows
- Table A15. Emerging and Developing Economies: Reserves
- Table A16. Summary of Sources and Uses of World Savings
- Table A17. Summary of Word Medium-Term Baseline Scenario
- Online Tables
- Table B1. Advanced Economies: Unemployment, Employment, and Real per Capita GDP
- Table B2. Emerging and Developing Economies: Real GDP
- Table B3. Advanced Economies: Hourly Earnings, Productivity, and Unit Labor Costs in Manufacturing
- Table B4. Emerging and Developing Economies: Consumer Prices
- Table B5. Summary of Financial Indicators
- Table B6. Advanced Economies: General and Central Government Net Lending/Borrowing and Excluding Social Security Schemes
- Table B7. Advanced Economies: General Government Structural Balances
- Table B8. Advanced Economies: Exchange Rates
- Table B9. Emerging and Developing Economies: General Government Net Lending/Borrowing and Overall Fiscal Balance
- Table B10. Emerging and Developing Economies: Broad Money Aggregates
- Table B11. Advanced Economies: Export Volumes, Import Volumes, and Terms of Trade in Goods and Services
- Table B12. Emerging and Developing Economies by Region: Total Trade in Goods
- Table B13. Emerging and Developing Economies by Source of Export Earnings: Total Trade in Goods
- Table B14. Advanced Economies: Current Account Transactions
- Table B15. Emerging and Developing Economies: Balances on Current Account
- Table B16. Emerging and Developing Economies by Region: Current Account Transactions
- Table B17. Emerging and Developing Economies by Analytical Criteria: Current Account Transactions
- Table B18. Summary of Balance of Payments, Financial Flows, and External Financing
- Table B19. Emerging and Developing Economies by Region: Balance of Payments and External Financing
- Table B20. Emerging and Developing Economies by Analytical Criteria: Balance of Payments and External Financing
- Table B21. Summary of External Debt and Debt Service
- Table B22. Emerging and Developing Economies by Region: External Debt by Maturity and Type of Creditor
- Table B23. Emerging and Developing Economies by Analytical Criteria: External Debt, by Maturity and Type of Creditor
- Table B24. Emerging and Developing Economies: Ratio of External Debt to GDP
- Table B25. Emerging and Developing Economies: Debt-Service Ratios
- Table B26. Emerging and Developing Economies, Medium-Term Baseline Scenario: Selected Economic Indicators
- Figure 1.1. Global Indicators
- Figure 1.2. Recent Financial Market Developments
- Figure 1.3. Emerging Market Conditions
- Figure 1.4. Developments in Mature Credit Markets
- Figure 1.5. Current and Forward-Looking Trade Indicators
- Figure 1.6. Global Outlook
- Figure 1.7. Current and Forward-Looking Growth Indicators
- Figure 1.8. Prospects for Near-Term Activity
- Figure 1.9. Balance Sheets and Saving Rates
- Figure 1.10. Global Inflation
- Figure 1.11. Measures of Monetary Policy and Liquidity in Selected Advanced and Emerging Economes
- Figure 1.12. General Government Fiscal Balances and Public Debt
- Figure 1.13. Risks to the Global Outlook
- Figure 1.14. Emerging Tensions
- Figure 1.15. Overheating Indicators and Capital Inflows
- Figure 1.16. Emerging Market Economies with Strong Credit Expansion
- Figure 1.17. Global Imbalances
- Figure 1.18. External Developments
- Figure 1.19. Unemployment
- Figure 1.20. Financial Conditions Indices
- Figure 1.21. Commodity Prices
- Figure 1.22. World Energy Market Developments
- Figure 1.23. Developments in Base Metal Markets
- Figure 1.24. Developments in Markets for Major Food Crops
- Figure 1.25. Changes in International and Domestic Food Prices and Headline Inflation
- Figure 1.26. First-Round Impact of Commodity Price Changes on the Trade Balances of Selected Emerging and Developing Economies
- Figure 1.1.1. Financial Disruptions
- Figure 1.1.2. Effect of Advanced Economy House Price Busts
- Figure 1.2.1. WEO Downside Scenario 1: Implications of Overestimating Potential Output
- Figure 1.2.2. WEO Downside Scenario 2: Implications of Overestimating Potential Output with Sticky Inflation
- Figure 1.3.1. Optimized Exchange Rate Coefficient and Relative Loss as a Function of Home Output Gap Response
- Figure 1.4.1. Japan: Selected Macroeconomic Indicators
- Figure 1.4.2. Japan and China: Balance Sheets and Export Content
- Figure 2.1. Global Average Projected Real GDP Growth during 2011-12
- Figure 2.2. Output Gaps
- Figure 2.3. United States and Canada: Average Projected Real GDP Growth during 2011-12
- Figure 2.4. United States: Gaining Traction
- Figure 2.5. Europe: Average Projected Real GDP Growth during 2011-12
- Figure 2.6. Europe: A Gradual and Uneven Recovery Continues
- Figure 2.7. Commonwealth of Independent States: Average Projected Real GDP Growth during 2011-12
- Figure 2.8. Commonwealth of Independent States: A Moderate Recovery Is under Way
- Figure 2.9. Asia: Average Projected Real GDP Growth during 2011-12
- Figure 2.10. Asia: Still in the Lead
- Figure 2.11. Latin America and the Caribbean: Average Projected Real GDP Growth during 2011-12
- Figure 2.12. Latin America and the Caribbean: Icarus or Daedalus?
- Figure 2.13. Sub-Saharan Africa: Average Projected Real GDP Growth during 2011-12
- Figure 2.14. Sub-Saharan Africa: Back to Precrisis Growth
- Figure 2.15. Middle East and North Africa: Average Projected Real GDP Growth during 2011-12
- Figure 2.16. Middle East and North Africa: The Recovery Continues in an Uncertain Environment
- Figure 2.1.1. Economic Activity and External Adjustment in the EU Periphery
- Figure 2.1.2. External Adjustment in the EU Periphery
- Figure 3.1. Energy Prices and Long-Term Price Trends
- Figure 3.2. Global Energy Demand, 1980-2008
- Figure 3.3. Relationship between per Capita Energy Consumption and GDP Growth
- Figure 3.4. Primary Energy Consumption
- Figure 3.5. Oil Consumption in China and in Selected Advanced Economies
- Figure 3.6. The Big Switch: Oil Share in the Electric Power Sector
- Figure 3.7. Global Oil Market Developments
- Figure 3.8. Projected Growth in Crude Oil Capacity
- Figure 3.9. Oil Scarcity and the Global Economy: Benchmark Scenario
- Figure 3.10. Alternative Scenario 1: Greater Substitution away from Oil
- Figure 3.11. Alternative Scenario 2: Greater Decline in Oil Production
- Figure 3.12. Alternative Scenario 3: Greater Economic Role for Oil
- Figure 3.1.1. Life Cycle of Global Oil Production
- Figure 3.2.1. U.S. Natural Gas Supply, 1998-2009
- Figure 3.2.2. U.S. Natural Gas versus Oil Spot Prices
- Figure 4.1. The Collapse and Recovery of Cross-Border Capital Inflows
- Figure 4.2. The Evolution of Gross and Net Capital Flows
- Figure 4.3. The Recovery of Net Private Capital Flows
- Figure 4.4. The Recovery of Net Capital Flows and Their Composition
- Figure 4.5. The Size and Composition of Net Private Capital Flows during Waves of Large Capital Flows to Emerging Market Economies
- Figure 4.6. Regional Variation in Net Private Capital Flows to Emerging Market Economies
- Figure 4.7. The Relative Importance of Various Types of Flow
- Figure 4.8. Historical Trends: A Shift away from Debt-Creating Flows
- Figure 4.9. The Volatility of Net Private Capital Flows
- Figure 4.10. Correlations between Net Flows of Various Types and the Rest of the Financial Account
- Figure 4.11. The Persistence of Net Private Capital Flows
- Figure 4.12. Historical Periods of Easy External Financing and High Growth Differential between Emerging Market and Advanced Economies
- Figure 4.13. Net Private Capital Flows during Periods of Easy External Financing and High Growth Differential between Emerging Market and Advanced Economies
- Figure 4.14. Net Private Flows to Emerging Market Economies under Alternative Financing Conditions
- Figure 4.15. Common Factors Underlying the Variation in Net Private Capital Flows to Advanced and Emerging Market Economies
- Figure 4.16. Difference in the Response of Net Private Capital Flows to U.S. Monetary Tightening across Economies
- Figure 4.17. Difference in the Response of Emerging Market Economy Net Private Capital Flows to U.S. Monetary Tightening by Selected Economic Characteristics
- Figure 4.18. Difference in the Response of Emerging Market Economy Net Private Capital Flows to U.S. Monetary Tightening by Type of Flow
- Figure 4.19. Difference in the Response of Emerging Market Economy Net Private Capital Flows to U.S. Monetary Tightening under Alternative Global Economic Conditions
- Figure 4.20. The Relative Importance of Various Types of Flow across Emerging Market Regions
- Figure 4.21. The Volatility of Net Private Capital Flows across Emerging Market Regions
- Figure 4.22. The Persistence of Net Private Capital Flows across Emerging Market Regions
- Figure 4.23. Realized and Unanticipated Changes in U.S. Monetary Policy over Time
- Figure 4.24. Robustness Checks for the Difference in Response of Net Private Capital Flows to Directly Financially Exposed Emerging Market Economies
ASSUMPTIONS AND CONVENTIONS
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.
FURTHER INFORMATION AND DATA
This version of the World Economic Outlook is available in full on the IMF’s website, www.imf.org. 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
International Monetary Fund
700 19th Street, N.W.
Washington, D.C. 20431, U.S.A.
Forum address: www.imf.org/weoforum 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.
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.