By Olivier Blanchard
(Versions in Español, عربي)
For the past six months, the world economy has been on what is best described as a roller coaster.
Last autumn, a simmering European crisis became acute, threatening another Lehman-size event, and the end of the recovery. Strong policy measures were taken, new governments came to power in Italy and Spain, the European Union adopted a tough fiscal pact, and the European central bank injected badly needed liquidity. Things have quieted down since, but an uneasy calm remains. At any moment, it seems, things could get bad again.
This shapes our forecasts. Our baseline forecast, released by the IMF on April 17, is for low growth in advanced countries, especially in Europe. But downside risks are very much present.
Brakes hampering growth
This baseline is constructed on the assumption that another European flare-up will be avoided, but that uncertainty will linger on. It recognizes that, even in this case, there are still strong brakes to growth in advanced countries: Fiscal consolidation is needed and is proceeding, but is weighing on growth. Bank deleveraging is also needed, but is leading, especially in Europe, to tight credit. In many countries, in particular in the United States, some households are burdened with high debt, leading to lower consumption. Foreclosures are weighing on housing prices, and on housing investment.
Filed under: Advanced Economies, Africa, Asia, Economic Crisis, Economic outlook, Economic research, Emerging Markets, Employment, Europe, Finance, Financial Crisis, Fiscal policy, Fiscal Stimulus, Globalization, growth, Inequality, International Monetary Fund, Latin America, LICs, Low-income countries, Middle East, Public debt, recession | Tagged: Africa, Brazil, China, European Union, forecast, France, Germany, IMF blog, iMFdirect, India, Italy, Olivier Blanchard, Spain, Spring Meetings, WEO, World Economic Outlook | 7 Comments »