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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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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Are Emerging Markets Adjusting to a New Normal?


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

Emerging markets have grown at a remarkable pace through most of the 2000s. They even rebounded strongly from the Great Recession, notwithstanding the sluggishness in advanced economies. Easy global financial conditions, rising commodity prices and beneficial terms of trade potentially compensated for weak external demand from the advanced economies.

But now, emerging market growth, while still strong, has begun to slow. This oddly coincides with an outlook for advanced economies that is improving, even if gradually. So what’s behind this dichotomy?

Emerging markets are adjusting to changes in the external environment. On the one hand, the incipient recovery in advanced economies is helping emerging markets, including through higher exports. On the other hand, the favourable external financing conditions are now beginning to reverse, implying a tougher financial environment for emerging markets. Then you have domestic factors, which appear to have pulled down growth in some emerging markets (see also IMF blog post on January 22, 2014, and December 18, 2013).

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Where Are Real Interest Rates Headed?


By Andrea Pescatori and Davide Furceri

In the past few years, many borrowers with good credit ratings have enjoyed a cost of debt close to zero or even negative when it is adjusted for inflation. In other words, real interest rates, and, thus, the real cost of borrowing, have been about zero. The rate decline has been global—average global 10 year real rate declined from 6 percent in 1983 to almost zero in 2012 (see figure).

Because the recent interest rate declines reflect, to a large extent, weak economic conditions in advanced economies after the global financial crisis, some reversals are likely as these economy return to a more normal state.

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Recovery Strengthening, but Much Work Remains


WEOBy: Olivier Blanchard

(Versions in Español عربيРусский,  Français, and 中文 )

I want to take a moment today to remember our colleague Wabel Abdallah, who was our resident representative in Afghanistan and who, as many of you know, was killed in the terrorist attack in Kabul on Friday. We are mourning a colleague, a friend to many of us, above all a dedicated civil servant who represented the best the Fund has to offer, and gave his life in the line of duty, helping the Afghan people. Our hearts go out to his family and to the many victims of this brutal attack.

Let me now turn to our update of the World Economic Outlook and distill its three main messages:

First, the recovery is strengthening.  We forecast world growth to increase from 3% in 2013 to 3.7% in 2014.  We forecast growth in advanced economies to increase from 1.3% in 2013 to 2.2% in 2014.  And we forecast growth in emerging market and developing economies to increase from 4.7% in 2013 to 5.1% in 2014.

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Advanced Economies Strengthening, Emerging Market Economies Weakening


WEOBy Olivier Blanchard

(Versions in عربي, 中文Français日本語, Русский, and Español)

The issue probably foremost on everyone’s mind, is the fiscal situation in the United States, and its potential implications.

While the focus is on the shutdown and the debt ceiling,  we should not forget the sequester, which is leading to a fiscal consolidation this year which is both too large and too arbitrary. The shutdown is yet another bad outcome, although one which, if it does not last very long, has limited economic consequences.  

Failure to lift the debt ceiling would, however, be a game changer.  Prolonged failure would lead to an extreme fiscal consolidation, and surely derail the U.S. recovery. But the effects of any failure to repay the debt would be felt right away, leading to potentially major disruptions in financial markets, both in the U.S. and abroad.   We see this as a tail risk, with low probability, but, were it to happen, it would have major consequences.

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