The IMF’s Global Economic Outlook
The International Monetary Fund (IMF) held a joint meeting with the World Bank in Washington in April. This meeting provided the opportunity for the IMF to announce its views on global economic prospects. The IMF noted that the global economic outlook is improving but the road to recovery in the advanced economies will remain uneven. World output growth is expected at around 3.25 percent in 2013, increasing to four percent in 2014. In advanced economies, activity is expected to gradually accelerate, starting in the second half of 2013. Private demand appears increasingly robust in the United States but is still very sluggish in the euro area. In emerging markets and developing economies, activity has already improved.
Over the last six months, advanced economy policymakers have successfully defused two of the short-term threats to the global economy, namely, the risk of a euro area breakup and a sharp fiscal contraction in the US that was posed by the “fiscal cliff”. As a result, financial stability has improved and financial markets have rallied on a broad front. The financial market rally has been helping economic recovery by improving funding conditions and supporting confidence. While US private demand has been showing strength as credit and housing markets are improving, larger than expected fiscal adjustment is projected to keep real GDP growth at about two percent in 2013. In the euro area, better conditions for periphery sovereigns are not yet passing through to companies and households, because banks are still struggling with poor profitability and low capital conditions, which in turn constrain the supply of credit. In many economies activity will also be held back by continued fiscal adjustment, competitiveness problems, and balance sheet weaknesses. Japan’s economy will see a rebound with real GDP growth of around 1.50 per 2013cent, driven by fiscal and monetary stimulus policies.
There was a noticeable slowdown in the emerging market and developing economies during 2012, reflecting a sharp deceleration in demand from key advanced economies, domestic policy tightening, and the end of investment booms in some of the major emerging market economies. But with consumer demand resilient, macroeconomic policy on hold, and exports reviving, most economies in Asia and sub-Saharan Africa and many economies in Latin America and the Commonwealth of Independent States are now experiencing higher growth rates.
Notwithstanding old dangers and new turbulence, the near-term risk situation has improved as recent policy actions in Europe and the US have addressed some of the greatest short-term risks. In the euro area, the main short-term problems relate to the effects of fiscal adjustment policies, weak balance sheets, credit channels in the periphery and slow progress with economic and monetary union. In the US, Congressional action to raise the debt limit and resolve issues arising from the budget sequester will have an influence on economic growth prospects. Over the medium term, downside risks revolve around the absence of strong fiscal consolidation plans in the US and Japan, private sector debt levels, and insufficient progress in the euro area.
Recent loosening of monetary policy in Japan and other factors have resulted in a large depreciation of the yen and have produced some concerns about the potential effects of competitive exchange rate adjustments and depreciations. At present, there are no significantly large deviations of the major currencies from medium term fundamentals, with the US dollar and euro appearing moderately overvalued and the renminbi moderately undervalued
According to the IMF, there is no silver bullet to address all the concerns about demand and debt. Fiscal adjustment needs to progress gradually, building on measures that limit damage to demand in the short term; monetary policy needs to remain supportive of economic activity; financial policies need to help improve the pass-through of monetary policy; and structural and other policies need to spur potential output and global demand rebalancing. The IMF recommends that all economies pursue policies that foster internal and external balance. In the major advanced economies, this requires more progress with medium-term and long-term fiscal adjustment plans and balance sheet repair. Short-term fiscal policies could then be less restrictive and, taken together with improving balance sheets, would relieve pressure from monetary policy. Emerging market and developing economies face different challenges. Key external surplus economies should allow their exchange rates to become more market-determined and should implement structural policies to rebalance the economy toward consumption-driven growth. Other economies need to deploy structural policies to foster the healthy absorption of capital inflows. When these flows threaten to destabilize their economies, these nations can adopt macroprudential or capital flow management measures to avoid the buildup of major internal balances. Overall, the IMF believes that the global economic outlook is improving, but in expressing concerns over policy spillovers, the IMF urges policymakers to not relax their efforts to manage economic recovery and stability.