Legacies, Clouds and Uncertainties


WEOBy Olivier Blanchard

(Versions in Françaisespañol, 中文Русский日本語)

The recovery continues, but it is weak and uneven.

You have now seen the basic numbers from our latest projections in the October 2014 World Economic Outlook released today.  We forecast world growth to be 3.3% in 2014, down 0.1% from our July forecast, and 3.8% in 2015, down 0.2% from our July forecast.

This number hides however very different evolutions.  Some countries have recovered or nearly recovered.  But others are still struggling.

Looking around the world, economies are subject to two main forces.  One from the past:  Countries have to deal with the legacies of the financial crisis, ranging from debt overhangs to high unemployment.  One from the future, or more accurately, the anticipated future:   Potential growth rates are being revised down, and these worse prospects are in turn affecting confidence, demand, and growth today.

Because these two forces play in different countries to different degrees, economic evolutions are becoming more differentiated.  With this in mind, let me take you on the usual quick tour of the world:

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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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Asia’s Seismic Shift: How Can the Financial Sector Serve Better?


Min ZhuBy Min Zhu

(Versions in  中文Español)

Asia is set to be the powerhouse for growth in the next decade, just as it was in the last one. The size of its economy is expected to expand more rapidly than the other regions of the world, and its share in the world output is expected to rise from 30 percent to more than 40 percent in the coming decade. The structure of the economy is expected to continue to transform from a narrower manufacturing hub to a group of vibrant, diverse and large markets with a rising middle-class population.

The role of the financial sector is critical in the success of this seismic transformation. Let me explain by focusing on three areas:

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As Demand Improves, Time to Focus More on Supply


2010 WEO BLANCHARD By Olivier Blanchard

(Version in  FrançaisEspañol, Русский, عربي中文  and 日本語)

The dynamics that were emerging at the time of the October 2013 World Economic Outlook are becoming more visible. Put simply, the recovery is strengthening.

In our recent World Economic Outlook, we forecast world growth to be 3.6 percent this year and 3.9 percent next year, up from 3.0 percent last year.

In advanced economies, we forecast growth to reach 2.2 percent in 2014, up from 1.3 percent in 2013.

The recovery which was starting to take hold in October is becoming not only stronger, but also broader.  The various brakes that hampered growth are being slowly loosened.   Fiscal consolidation is slowing, and investors are less worried about debt sustainability. Banks are gradually becoming stronger. Although we are far short of a full recovery, the normalization of monetary policy—both conventional and unconventional—is now on the agenda.

Brakes are loosened at different paces however, and the recovery remains uneven.

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Are Emerging Markets Still On the Receiving End?


By Aseel Almansour, Aqib Aslam, John Bluedorn and Rupa Duttagupta

(Version in EspañolFrançaisРусский中文 and 日本語)

The recent slowdown in emerging market growth is fueling a growing mania across markets and policy circles. Some worry that a large part of their stellar pace of growth over the 2000s (Figure 1) was due to a favorable external environment—cheap credit and high commodity prices. And, therefore, as advanced economies gather momentum now and begin to normalize their interest rates, and commodity price gains begin to reverse, emerging market growth could slip further.

Others instead contend that internal or domestic factors have played a role, with improved standards of governance and genuine structural reforms and robust policies, driving a fundamental transformation in the sources of emerging market growth towards a lower yet more sustainable trajectory.

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India’s Investment Slowdown: The High Cost of Economic Policy Uncertainty


By Rahul Anand and Volodymyr Tulin

India, after witnessing spectacular growth averaging above 9 percent over the past decade, has started to slow in the last few years. The slump in infrastructure and corporate investment has been the single biggest contributor to India’s recent growth slowdown.

India’s investment growth, averaging above 12 percent during the last decade fell to less than one percent in the last two years. What is especially worrisome is that more and more investment projects are getting delayed and shelved, while the pipeline of new projects has become exceptionally thin.

This slowdown has sparked an intense public debate about its causes. Some commentators, including representatives of the business community, argue that high interest rates, which raise financing costs, are the major culprit, dampening investment.  Others maintain that interest rates are only partly responsible for the current weak levels of investment, suggesting that a host of other factors, particularly on the supply side, are at play.

Our new Working Paper seeks to shed some light on the reasons behind this investment malaise. Using a novel index of economic policy uncertainty—an innovation in our analysis—we find that heightened uncertainty regarding the future course of broader economic policies and deteriorating business confidence have played a significant role in the recent investment slowdown. 

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Emerging Markets Need To Do More To Remain Engines of Global Growth


Min ZhuBy Min Zhu

(Version in FrançaisРусский日本語Portuguêsعربي 中文, and Español)

We had a big debate on emerging markets’ growth prospects at our Annual Meetings in October 2013. We lowered our 2013 growth forecast for emerging markets and developing economies by a whopping 0.5 percentage points compared to our earlier forecast. Some argued that we were too pessimistic. Others said that we should have stuck with the lower-growth scenario we had devised at the onset of the global financial crisis.

Fast forward to today. Indeed, most recent figures indicate that the engines of global growth—emerging markets and developing economies—have slowed significantly. Their growth rate dropped about 3 percentage points in 2013 from 2010 levels, with more than two thirds of countries seeing a decline— Brazil, China, and India lead the pack. This is important for the global economy, since these economies generate half of today’s global economic activity.

In my more recent travels around the world—five regions on three continents—I received the same questions everywhere: what is happening with the emerging markets? Is the slowdown permanent? Can emerging markets boost their growth? What are the downside risks?

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