World Economic Outlook

Recovery Strengthens, Remains Uneven April 2014

1

April 2014 WEO: Key Messages

• Global growth strengthened in 2013H2, will accelerate further in 2014-15

• Advanced economies are providing impetus for the acceleration • Gaining traction; less fiscal drag, monetary conditions still accommodative

• Emerging market and developing economies (EMDEs) to strengthen only modestly • Greater demand for exports from AEs, offset by tighter financial conditions

• Acute risks have decreased, but risks have not disappeared • Geopolitical risks, including Ukraine/Russia • Low inflation/deflation esp. in euro area • Risk to EMDEs from changing external environment (more investor differentiation)

2

Global activity has strengthened, led by advanced economies.

-5

0

5

10

15

20

2010 2011 2012 2013 Feb.14

PMI (Δ50, 3mma)

IP

CPB Trade Monitor

World Trade Volumes, Industrial Production and Manufacturing PMI (3mma, annualized percent change)

Sources: CPB Netherlands Bureau for Economic Policy Analysis; Haver Analytics; Markit Economics; and IMF staff calculations. 3

47

48

49

50

51

52

53

54

55

Jan. 2012 Jul. 12 Jan. 13 Jul. 13 Feb.14

Advanced Economies

Emerging Market Economies

Manufacturing PMI (index; above 50 = expansion)

4

Looking forward, advanced economy fiscal policy will be less tight in 2014 and 2015, except in Japan.

Source: IMF staff estimates.

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2010 11 12 13 14 15

Euro area United States Japan

Fiscal Impulse (Change in structural balance as percent of GDP)

4

Monetary accommodation will continue; US policy rates are expected to start rising in 2015.

5

0

0.5

1

1.5

2

2.5

t 6 Months t+12 18 Months t+24 30 Months t+36

United States

Europe

United Kingdom

Policy Rate Expectations (percent; months on x-axis; dashed lines are from the October 2013 WEO)

Sources: Bloomberg, L.P.; and IMF staff calculations.

-15

-10

-5

0

5

10

15

-5

-4

-3

-2

-1

0

1

2

3

4

5

2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Domestic demand in AEs

Exports of EMs (RHS) 1/

For EMs, exports will be supported by stronger demand from AEs…

6

AE Domestic Demand and EM Exports (percent change from year earlier)

Sources: IMF, World Economic Outlook; and IMF staff estimates. 1/ Excludes China.

…but this will be offset by tighter financing conditions.

7

-40

-20

0

20

40

60

80

100

120

140

160

Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14

Advanced Economies 1/

Emerging Market Economies 2/

Ten-Year Government Bond Yields (change since Jan. 1, 2013 in bps)

Sources: Bloomberg, L.P.; and IMF staff calculations. 1/ Average for Germany, Japan and United States. 2/ Average for 14 emerging market economies.

70

80

90

100

110

120

130

140

Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14

Advanced Economies 1/

Emerging Market Economies 2/

Equity Prices (Index, Jan. 1, 2013 = 100)

World

U.S. Euro Area Japan Brazil Russia India China

2014 (Apr. 2014) 3.6 2.8 1.2 1.4 1.8 1.3 5.4 7.5

Revision from Jan. 2014 -0.1 0.0 0.1 -0.3 -0.5 -0.6 0.0 0.0

2015 (Jan. 2014) 3.9 3.0 1.5 1.0 2.7 2.3 6.4 7.3

Revision from Jan. 2014 -0.1 0.0 0.1 0.0 -0.2 -0.2 0.0 0.0

WEO Real GDP Growth Projections (percent change from a year earlier)

Source: IMF, World Economic Outlook.

Global growth is expected to strengthen…

8

8

…but it will be uneven.

9 Sources: IMF, World Economic Outlook; and IMF staff calculations.

0

2

4

6

8

10

12

61

62

63

64

65

66

67

2008 09 10 11 12 13

Labor Force Participation Rate

Unemployment Rate (left scale)

In the US, consumer demand has been supported by higher housing and stock prices, and by improving labor market conditions.

10 Source: Bloomberg, L.P.; Bureau of Labor Statistics; Federal Housing Finance Agency; Haver Analytics; and IMF staff calculations. Note: FHFA HPI = Federal housing Finance Agency Housing Price index.

House and Equity Prices (year-over-year percent change)

Feb.14

U.S. Labor Market (percent)

-15

-10

-5

0

5

10

15

0

20

40

60

80

100

120

140

160

180

2006 07 08 09 10 11 12 13 Jan. 14

S&P 500 (index; Jan. 2005 = 100)

U.S. FHFA HPI (left scale)

US activity has also been helped by falling household debt and supportive credit conditions. Contrast this to the euro area…

Sources: Haver Analytics; and IMF staff calculations. 1/ Euro area includes subsector employers (including own-account workers).

Nonfinancial Firm and Household Credit Growth (year-over-year percent change)

Household Debt-to-Income Ratio (percent)

11

70

80

90

100

110

120

130

140

2000 01 02 03 04 05 06 07 08 09 10 11 12 13

Euro area 1/

United States

13.Q4

-4

-2

0

2

4

6

8

10

12

2006 07 08 09 10 11 12 13

Euro area

United States

13.Q4

…where growth has picked up, but high debt (public and private) and financial fragmentation continue to weigh on stressed economies.

Sources: European Central Bank (ECB); Haver Analytics; and IMF staff estimates. 1/ Monetary and financial institutions’ lending to corporations under €1 million, 1–5 years.

SME Real Corporate Lending Rates 1/ (percent)

-5

-4

-3

-2

-1

0

1

2

Euro area Germany France Italy Spain

2013 GDP Growth

2014 GDP Growth

Output gap

GDP Growth and Output Gaps (percent)

0

1

2

3

4

5

6

7

2007 08 09 10 11 12 13 Jan. 14

Germany

Italy

Spain

12

In Japan depreciation has supported exports, and BoJ asset purchases have raised inflation expectations.

13

Japan: Financial Markets (index; Dec. 3, 2012 = 100)

Sources: IMF, World Economic Outlook; and Bloomberg, L.P. 1/ 5-year ahead inflation forecast. 2/ Excludes food and energy.

80

85

90

95

100

105

110

90

100

110

120

130

140

150

160

170

180

Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14

Nikkei 225

Yen/USD (RHS)

(+ = Yen depreciation)

Japan: Inflation Expectations (percent)

-1.2

-0.8

-0.4

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14

5yr Breakeven

Consensus 1/

Actual core CPI 2/

BoJ adopts 2 percent target

Mar-14

But growth has still been driven mainly by public spending, with private domestic demand (esp. investment) still weak.

14

Pre- and Post-Abenomics (index; 2012Q4=100)

Source: IMF, World Economic Outlook. 1/ October 2012 WEO. Prior to the 15 percent REER yen depreciation. 2/ IMF staff estimates.

96

98

100

102

104

106

108

110

12Q4 13Q3 12Q4 13Q3 12Q4 13Q3 12Q4 13Q3 12Q4 13Q3

Pre-Abenomics 1/ Abenomics 2/

GDP Public Spending Private Consumption Corporate investment Exports

China Contribution to Global GDP Growth (percent)

China GDP Growth (percent)

Growth in China is expected to moderate, but its contribution to

global growth remains substantial.

-0.5

0.0

0.5

1.0

1.5

2.0

-5

0

5

10

15

20

Contribution to Global Growth

PPP Share (Right scale)

Source: IMF staff estimates 15

-5

0

5

10

15

20

1963 67 71 75 79 83 87 91 95 99 2003 07 11 15 19

Average of GDP Growth

80

100

120

140

160

180

200

220

240

260

2005 06 07 08 09 10 11 12 13 14 15

Food

Metal

Energy

EM Terms of Trade (Index; 2000 = 100)

Commodity Prices (Index; 2005 = 100)

No boost for commodity exporters, but no bust either. Downside

risks to some commodity prices from supply response to high prices.

80

90

100

110

120

130

140

1980 84 88 92 96 2000 04 08 12 16

Emerging Market and Developing Economies

Latin America and the Caribbean

Brazil

Mexico

Source: IMF staff estimates. 16

15. Q4

19

Acute risks have decreased, but risks have not disappeared.

• Geopolitical risks, including Ukraine/Russia

• Advanced economy risks Risks to activity from low inflation/deflation, esp. in euro area

Euro area reform fatigue

Risks relating to US monetary policy normalization

Some upside risks from rising confidence and pent-up investment demand

• Emerging market risks Further growth disappointments (lower potential; changing

environment)

Lower growth in China due to policy tightening

17

Euro area deflation risks are non-trivial

Low inflation/deflation affects output via:

• Higher real interest rates (-)

• Higher real private/public debt (-)

18

Inflation Fan Chart 1/ (percent)

Source: IMF staff estimates. 1/ Dashes indicate Global Projection Model (GPM) forecast. Bands indicate 90 percent and 50 percent confidence intervals.

-3

-2

-1

0

1

2

3

4

12Q1 12Q4 13Q3 14Q2 15Q1 15Q4

Many EM currencies have depreciated, some more than others…

19

Nominal Exchange Rates (U.S. dollars per national currency; percent change from May 22, 2013 to March 31, 2014)

Sources: Global Insight; IMF, International Financial Statistics. Note: COL = Colombia; PER = Peru; CHN = China; POL = Poland; MEX = Mexico; RUS = Russia; IND = India; IDN = Indonesia; BRA = Brazil; TUR = THA; PHL = Philippines; CHL = Chile.

-20

-15

-10

-5

0

5

10

COL PER MYS CHN POL MEX RUS IND IDN BRA TUR THA PHL CHL ZAF

Percent Change from Dec. 18, 2013 to Mar. 31, 2014

…not because countries have suddenly become more vulnerable, but because investors have become more sensitive.

20

All EMs

Sources: IMF, World Economic Outlook; IMF, International Financial Statistics; and staff calculations. 1/ Brazil, Indonesia, India, Turkey, and South Africa.

-10

0

10

20

30

40

-5

0

5

10

15

20

CA Balance (percent of

GDP)

Fiscal Balance (percent of

GDP)

Inflation (percent)

Reserves (percent of GDP, RHS)

2008 2010 2013

Key EMs Under Pressure 1/

-10

0

10

20

30

40

-5

0

5

10

15

20

CA Balance (percent of

GDP)

Fiscal Balance (percent of

GDP)

Inflation (percent)

Reserves (percent of GDP, RHS)

2008 2010 2013

Advanced economies: avoid premature withdrawal of monetary accommodation

Euro area: financial repair/reform, including banking union; structural reforms

Japan: structural reforms; medium-term fiscal adjustment

US: monetary policy communications; medium-term fiscal adjustment

Policies

China: rebalancing growth; ensure financial stability

India: tackle high inflation, remove structural bottlenecks

Brazil: tackle high inflation, raise domestic saving, foster private investment

Russia: guard against inflation, adverse shocks; improve the investment climate

Emerging and developing countries: (i) exchange rate flexibility as a shock

absorber; (ii) keep inflation well anchored; (iii) fiscal policy should be geared to

medium-term objectives; (iv) need structural reforms to raise medium-term

growth

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