Global Economy Faces Strong and Complex Cross Currents


WEOBy Olivier Blanchard

The world economy is facing strong and complex cross currents.  On the one hand, major economies are benefiting from the decline in the price of oil.  On the other, in many parts of the world, lower long run prospects adversely affect demand, resulting in a strong undertow.

We released the World Economic Outlook Update today in Beijing, China. The upshot for the global economy is that while we expect stronger growth in 2015 than in 2014, our forecast is slightly down from last October.  More specifically, our forecast for global growth in 2015 is 3.5%, 0.3% higher than global growth in 2014, but 0.3% less than our forecast in October. For 2016, we forecast 3.7% growth, again a downward revision from the last World Economic Outlook.

At the country level, the cross currents make for a complicated picture. Good news for oil importers, bad news for exporters. Good news for commodity importers, bad news for exporters. Continuing struggles for the countries which still show scars of the crisis, not so for others. Good news for countries more linked to the euro and the yen, bad news for those more linked to the dollar. In short, many different combinations, many different boxes, and countries in each box.

Let me expand a bit on some of these themes.

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Battling Global Unemployment: Too Soon to Declare Victory


Prakash LounganiBy Prakash Loungani

(Version in Français)

Seven years after the onset of the Great Recession, the global unemployment rate has returned to its pre-crisis level: the jobless rate fell to 5.6% in 2014; essentially the same as in 2007, the year before the recession (chart 1, left panel).

Global Unemployment 1

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Managing House Price Booms in Emerging Markets


Min ZhuBy Min Zhu

(Versions in 中文 and Español)

For the past decade, house prices have steadily increased in the vast majority of the 30 countries that make up the IMF’s House Price Index for Emerging Markets released today at a conference organized by the IMF and the Indian Institute of Management in Bangalore, India (Figure 1).

The index shows a lull in the aftermath of the global financial crisis, followed by an increase for nine consecutive quarters since 2012. This run-up—four times as fast as that in advanced economies—would be even more pronounced if the larger countries in the group such as China and India receive greater weight in the index.

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Emerging Markets & Volatility: Lessons from the Taper Tantrum


By Ratna Sahay and Preya Sharma

You may hear a sigh of relief from emerging market watchers as we approach the end of the year. Yet, against the backdrop of a prolonged period of low interest rates in advanced economies, huge capital flows, and a slowdown in emerging market growth, 2015 promises to keep us all on our toes.  Differences in the timing of exit from unconventional monetary policy in advanced economies will have a global impact. The IMF has been keeping a close eye on developments in emerging markets, providing analysis on issues such as how investors’ differentiate between emerging market countries, the impact of volatile markets, and the factors explaining the slowdown in growth.

In a recent paper, we take a look back at what happened before and during the tapering episode to draw out the key lessons for policymakers. Past experience is clear: decisions by major central banks can have sizable global spillovers. Announcements by the U.S. Federal Reserve, in particular, have been strongly correlated with asset price volatility and capital flows in emerging markets. With expectations of Fed tightening to begin in 2015, we think a better understanding of these events can better inform policymakers’ decisions.

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Portfolio Investment in Emerging Markets: More Than Just Ebb and Flow


Evan PapageorgioBy Evan Papageorgiou

When the U.S. Federal Reserve first mentioned in 2013 the prospect of a cutback in its bond buying program, markets had a “taper tantrum.” Many emerging markets saw large increases in volatility, even though outflows from their domestic markets were small and short-lived. Now the Fed has ended its bond buying and is looking ahead to rate hikes, and portfolio flows continue to arrive at the shores of emerging market economies. So everything’s fine, right? Not quite.

In our latest Global Financial Stability Report, we show that the large concentration of advanced economy capital invested in emerging markets acts as a conduit of shocks from the former to the latter.

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Heat Wave: Rising Financial Risks in the United States


By Serkan Arslanalp, David Jones, and Sanjay Hazarika

Six years after the start of the global financial crisis, low interest rates and other central bank policies in the United States remain critical to encourage economic risk-taking—increased consumption by households, and greater willingness to invest and hire by businesses. However, this prolonged monetary ease also may have encouraged excessive financial risk-taking. Our analysis in the latest Global Financial Stability Report suggests that although economic benefits are becoming more evident, U.S. officials should remain alert to excessive financial risk-taking, particularly in lower-rated corporate debt markets.

Bullish financial risk-taking bears monitoring

Persistently low global interest rates have prompted investors to search for higher returns in a wide range of markets, such as stocks, and investment-grade and high-yield bonds. This has resulted in escalating asset prices, and enabled issuers to sell assets with a reduced degree of protection for investors (we give you an example below). The combined trends of more expensive assets and a weakening quality of issuance could pose risks to stability.

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Now Is a Good Time to Invest in Infrastructure


By Abdul Abiad, Davide Furceri, and Petia Topalova

Infrastructure is the backbone of well-functioning economies. Unfortunately, that backbone is becoming increasingly brittle in a number of advanced economies. For example, there has been a decline in the overall quality of infrastructure in the United States and Germany (Figure 1; see the FT 2014 and ASCE 2013 for more in infrastructure in the U.S., and Der Speigel 2014 and Kunert and Link 2013 for Germany). In many emerging market and developing economies, the expansion of the backbone has not kept pace with the broader economy, and this is stunting the ability of these economies to grow.

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