WORLD ECONOMIC OUTLOOK October 2012 Coping with High Debt and Sluggish Growth International Monetary Fund World Economic and Financial Surveys ©2012 International Monetary Fund Cover and Design: Luisa Menjivar and Jorge Salazar Composition: Maryland Composition Cataloging-in-Publication Data World economic outlook (International Monetary Fund) World economic outlook : a survey by the staff of the International Monetary Fund. — Washington, DC : International Monetary Fund, 1980– v. ; 28 cm. — (1981–1984: Occasional paper / International Monetary Fund, 0251-6365). — (1986– : World economic and financial surveys, 0256-6877) Semiannual. Some issues also have thematic titles. Has occasional updates, 1984– 1. Economic development — Periodicals. 2. Economic forecasting — Periodicals. 3. Economic policy — Periodicals. 4. International economic relations — Periodicals. I. International Monetary Fund. II. Series: Occasional paper (International Monetary Fund). III. Series: World economic and financial surveys. HC10.80 ISBN 978-1-61635-389-6 Publication orders may be placed online, by fax, or through the mail: International Monetary Fund, Publication Services P.O. Box 92780, Washington, DC 20090, U.S.A. Tel.: (202) 623-7430 Fax: (202) 623-7201 E-mail: publications@imf.org www.imfbookstore.org www.elibrary.imf.org International Monetary Fund | October 2012 iii Assumptions and Conventions xi Further Information and Data xii Preface xiii Foreword xv Executive Summary xvii Chapter 1. Global Prospects and Policies 1 Recent Developments 1 Prospects Are for Sluggish and Bumpy Growth 5 Cyclical Indicators Point to Slack in Advanced Economies 11 Policy Requirements 19 Special Feature: Commodity Market Review 29 Box 1.1. Are We Underestimating Short-Term Fiscal Multipliers? 41 Box 1.2. e Implications of High Public Debt in Advanced Economies 44 Box 1.3. How Does Uncertainty Aect Economic Performance? 49 Box 1.4. Unconventional Energy in the United States 54 Box 1.5. Food Supply Crunch—Who Is Most Vulnerable? 56 References 59 Chapter 2. Country and Regional Perspectives 61 Europe: In the Orbit of the Euro Area Crisis 62 e United States and Canada: Growth Continues, but Slack Remains 68 Asia: Calibrating a Soft Landing 71 Latin America and the Caribbean: Losing Some Buoyancy 75 Commonwealth of Independent States: Growth Is Still Robust 78 Middle East and North Africa: A Two-Speed Region 81 Sub-Saharan Africa: A Continued Favorable Outlook 84 Spillover Feature: e Financial Transmission of Stress in the Global Economy 88 References 99 Chapter 3. The Good, the Bad, and the Ugly: 100 Years of Dealing with Public Debt Overhangs 101 Historical Overview 102 Public Debt and Economic Growth 106 Case Studies 109 Analysis 122 Conclusion 125 References 126 CONTENTS world economic outlook: coping with high debt and SluggiSh growth iv International Monetary Fund | October 2012 Chapter 4. Resilience in Emerging Market and Developing Economies: Will It Last? 129 How Has Resilience Varied across Countries and over Time? 132 What Factors Are Associated with Resilience? 137 Putting It All Together: Multivariate Analysis 141 Wrapping Up: What Has Contributed to Increased Resilience? 144 Conclusion 149 Appendix 4.1. Data Sources 149 Appendix 4.2. Characterizing Resilience Using an Autoregressive Process on Growth 152 Appendix 4.3. Duration Analysis 154 Appendix 4.4. Robustness and Additional Results 155 Box 4.1. Jobs and Growth: Can’t Have One without the Other? 159 Box 4.2. How Would an Investment Slowdown in China Aect Other Emerging Market and Developing Economies? 164 Box 4.3. Resilient Growth in Low-Income Countries: Kenya and Tanzania 167 References 169 Annex: IMF Executive Board Discussion of the Outlook, September 2012 173 Statistical Appendix 175 Assumptions 175 What’s New 176 Data and Conventions 176 Classication of Countries 177 General Features and Composition of Groups in the World Economic Outlook Classication 177 Table A. Classication by World Economic Outlook Groups and eir Shares in Aggregate GDP, Exports of Goods and Services, and Population, 2011 179 Table B. Advanced Economies by Subgroup 180 Table C. European Union 180 Table D. Emerging Market and Developing Economies by Region and Main Source of Export Earnings 181 Table E. Emerging Market and Developing Economies by Region, Net External Position, and Status as Heavily Indebted Poor Countries 182 Box A1. Economic Policy Assumptions Underlying the Projections for Selected Economies 184 List of Tables 189 Output (Tables A1–A4) 190 Ination (Tables A5–A7) 197 Financial Policies (Table A8) 202 Foreign Trade (Table A9) 203 Current Account Transactions (Tables A10–A12) 205 Balance of Payments and External Financing (Tables A13–A14) 211 Flow of Funds (Table A15) 213 Medium-Term Baseline Scenario (Table A16) 217 World Economic Outlook, Selected Topics 219 contents International Monetary Fund | October 2012 v CONTENTS Tables Table 1.1. Overview of the World Economic Outlook Projections 2 Table 1.SF.1. Indices of Market Prices for Nonfuel and Fuel Commodities, 2009–12 30 Table 1.SF.2. Global Oil Supply and Demand by Region 35 Table 1.1.1. Growth Forecast Errors and Fiscal Consolidation 42 Table 1.2.1. Importance of the Intertemporal Elasticity of Substitution 47 Table 1.3.1. Uncertainty over the Business Cycle 51 Table 1.3.2. Uncertainty and Growth 52 Table 1.3.3. Uncertainty and Business Cycles 52 Table 1.5.1. Regional Food Vulnerability 56 Table 2.1. Selected European Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment 66 Table 2.2. Selected Advanced Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment 70 Table 2.3. Selected Asian Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment 72 Table 2.4. Selected Western Hemisphere Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment 78 Table 2.5. Commonwealth of Independent States: Real GDP, Consumer Prices, Current Account Balance, and Unemployment 79 Table 2.6. Selected Middle East and North African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment 82 Table 2.7. Selected Sub-Saharan African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment 87 Table 2.SF.1. Behavior of Stress Indicators, 2007–12 91 Table 2.SF.2. Data for Spillover Feature 94 Table 3.1. Dierentiating Episodes by the Change in the Debt-to-GDP Ratio 107 Table 4.1. What Ends Expansions and Recoveries? 143 Table 4.2. Data Sources 150 Table 4.3. Economy Groups 151 Table 4.4. AR(1) Median Coecients and Interquartile Range 153 Table 4.5. What Shortens Expansions? Robustness Checks 156 Table 4.1.1. Short-Term Relationship between Labor Market Outcomes and Growth, by Country Group 161 Table 4.1.2. Determinants of Okun Coecients and Employment Responsiveness 163 Table A1. Summary of World Output 190 Table A2. Advanced Economies: Real GDP and Total Domestic Demand 191 Table A3. Advanced Economies: Components of Real GDP 192 Table A4. Emerging Market and Developing Economies: Real GDP 194 Table A5. Summary of Ination 197 Table A6. Advanced Economies: Consumer Prices 198 Table A7. Emerging Market and Developing Economies: Consumer Prices 199 Table A8. Major Advanced Economies: General Government Fiscal Balances and Debt 202 Table A9. Summary of World Trade Volumes and Prices 203 Table A10. Summary of Balances on Current Account 205 Table A11. Advanced Economies: Balance on Current Account 207 world economic outlook: coping with high debt and SluggiSh growth vi International Monetary Fund | October 2012 Table A12. Emerging Market and Developing Economies: Balance on Current Account 208 Table A13. Emerging Market and Developing Economies: Net Financial Flows 211 Table A14. Emerging Market and Developing Economies: Private Financial Flows 212 Table A15. Summary of Sources and Uses of World Savings 213 Table A16. Summary of World Medium-Term Baseline Scenario 217 Online Tables Table B1. Advanced Economies: Unemployment, Employment, and Real per Capita GDP Table B2. Emerging Market and Developing Economies: Real GDP Table B3. Advanced Economies: Hourly Earnings, Productivity, and Unit Labor Costs in Manufacturing Table B4. Emerging Market and Developing Economies: Consumer Prices Table B5. Summary of Fiscal and Financial Indicators Table B6. Advanced Economies: General and Central Government Net Lending/Borrowing and Excluding Social Security Schemes Table B7. Advanced Economies: General Government Structural Balances Table B8. Emerging Market and Developing Economies: General Government Net Lending/Borrowing and Overall Fiscal Balance Table B9. Emerging Market and Developing Economies: General Government Net Lending/Borrowing Table B10. Advanced Economies: Exchange Rates Table B11. Emerging Market and Developing Economies: Broad Money Aggregates Table B12. Advanced Economies: Export Volumes, Import Volumes, and Terms of Trade in Goods and Services Table B13. Emerging Market and Developing Economies by Region: Total Trade in Goods Table B14. Emerging Market and Developing Economies by Source of Export Earnings: Total Trade in Goods Table B15. Advanced Economies: Current Account Transactions Table B16. Emerging Market and Developing Economies: Balances on Current Account Table B17. Emerging Market and Developing Economies by Region: Current Account Transactions Table B18. Emerging Market and Developing Economies by Analytical Criteria: Current Account Transactions Table B19. Summary of Balance of Payments, Financial Flows, and External Financing Table B20. Emerging Market and Developing Economies by Region: Balance of Payments and External Financing Table B21. Emerging Market and Developing Economies by Analytical Criteria: Balance of Payments and External Financing Table B22. Summary of External Debt and Debt Service Table B23. Emerging Market and Developing Economies by Region: External Debt, by Maturity and Type of Creditor Table B24. Emerging Market and Developing Economies by Analytical Criteria: External Debt, by Maturity and Type of Creditor Table B25. Emerging Market and Developing Economies: Ratio of External Debt to GDP Table B26. Emerging Market and Developing Economies: Debt-Service Ratios Table B27. Emerging Market and Developing Economies, Medium-Term Baseline Scenario: Selected Economic Indicators contents International Monetary Fund | October 2012 vii CONTENTS Figures Figure 1.1. Global Indicators 3 Figure 1.2. Euro Area Developments 4 Figure 1.3. Current and Forward-Looking Growth Indicators 5 Figure 1.4. Fiscal Policies 6 Figure 1.5. Monetary Policies 7 Figure 1.6. Recent Financial Market Developments 8 Figure 1.7. Emerging Market Conditions 9 Figure 1.8. GDP Growth 10 Figure 1.9. Overheating Indicators for the G20 Economies 12 Figure 1.10. Global Ination 13 Figure 1.11. Risks to the Global Outlook 14 Figure 1.12. Recessions and Deation Risks 15 Figure 1.13. Upside and Downside Scenarios 16 Figure 1.14. Output in Emerging Market and Developing Economies 19 Figure 1.15. Lower Global Growth Scenario 20 Figure 1.16. Crisis Comparisons 23 Figure 1.17. Global Imbalances 25 Figure 1.18. Euro Area Imbalances 26 Figure 1.SF.1. IMF Commodity Price Index 29 Figure 1.SF.2. Oil Prices and Volatility 31 Figure 1.SF.3. Base Metal Spot Prices 32 Figure 1.SF.4. Food Prices and Volatility 32 Figure 1.SF.5. Inuence of Common Factors: Pairwise Correlations with First Principal Components 33 Figure 1.SF.6. Commodity Prices and Economic Activity: First Principal Components 33 Figure 1.SF.7. Demand for Base Metals 34 Figure 1.SF.8. Oil Supply and Demand 36 Figure 1.SF.9. Oil Inventories and Spare Capacity 37 Figure 1.SF.10. Inventory Buers for Food 38 Figure 1.SF.11. Futures Prices 39 Figure 1.SF.12. Price Prospects for Selected Commodities 40 Figure 1.1.1. Growth Forecast Errors and Fiscal Consolidation Plans 43 Figure 1.2.1. Implications of Higher Debt Levels in Advanced Economies 45 Figure 1.2.2. Implications of Higher Debt Levels for the Global Economy 46 Figure 1.2.3. Illustrative Eects of Allowing Government Debt to Drift Higher 48 Figure 1.3.1. Evolution of Uncertainty 50 Figure 1.5.1. Regional Food Vulnerabilities 57 Figure 2.1. Revisions to WEO Growth Projections for 2012 and 2013 61 Figure 2.2. e Eects of Lower Potential Growth 62 Figure 2.3. Weekly Equity and Bond Fund Flows during Financial Stress in Advanced Economies 63 Figure 2.4. Europe: Revisions to 2013 GDP Growth Forecasts 64 Figure 2.5. Europe: In the Midst of Economic and Financial Stress 65 Figure 2.6. United States and Canada: Revisions to 2013 GDP Growth Forecasts 68 Figure 2.7. United States and Canada: A Weak Recovery 69 Figure 2.8. Asia: Revisions to 2013 GDP Growth Forecasts 73 Figure 2.9. Asia: Activity Decelerates 74 world economic outlook: coping with high debt and SluggiSh growth viii International Monetary Fund | October 2012 Figure 2.10. Latin America and the Caribbean: Revisions to 2013 GDP Growth Forecasts 76 Figure 2.11. Latin America: A Moderate Slowdown 77 Figure 2.12. Commonwealth of Independent States: Revisions to 2013 GDP Growth Forecasts 80 Figure 2.13. Commonwealth of Independent States: Vulnerable to Negative Spillovers 81 Figure 2.14. Middle East and North Africa: Revisions to 2013 GDP Growth Forecasts 83 Figure 2.15. Middle East and North Africa: An Uneven Recovery 84 Figure 2.16. Sub-Saharan Africa: Revisions to 2013 GDP Growth Forecasts 85 Figure 2.17. Sub-Saharan Africa: A Strong Expansion 86 Figure 2.SF.1. Financing Conditions for Euro Area Periphery Economies and the United States, 2007–12 89 Figure 2.SF.2. Changes in Stress Indicators, 2007–12 90 Figure 2.SF.3. Global Weekly Capital Flows 92 Figure 2.SF.4. Global Fund Flows during Stress 93 Figure 2.SF.5. e Composition of Capital Flows during Stress 93 Figure 2.SF.6. Global Asset Price Performance around Stress Episodes 97 Figure 2.SF.7. Global Trade Linkages with Advanced Economies and China 98 Figure 3.1. Public Debt in Advanced Economies 101 Figure 3.2. Debt-to-GDP Dynamics after Public Debt Reaches 100 Percent of GDP 104 Figure 3.3. Debt-to-GDP Dynamics 105 Figure 3.4. High Debt, Growth, and Ination 106 Figure 3.5. Debt and Growth Performance 108 Figure 3.6. Debt-to-GDP Dynamics after Crossing the 100 Percent reshold 109 Figure 3.7. United Kingdom: Deation in the Aftermath of World War I 111 Figure 3.8. United States: Debt Dynamics after World War II 113 Figure 3.9. Japan: Lost Decade 115 Figure 3.10. Italy: Fading Zeal 117 Figure 3.11. Belgium: A Marathon Not a Sprint 119 Figure 3.12. Canada: Fiscal Consolidation after 1985 121 Figure 3.13. Decomposition of Debt Dynamics in Case Study Countries 122 Figure 3.14. Contribution to GDP from Exports 124 Figure 4.1. e Strong Performance of Emerging Market and Developing Economies 129 Figure 4.2. Diverse Paths of Output 130 Figure 4.3. Dynamics of Output per Capita following Peaks 133 Figure 4.4. Emerging Market and Developing Economy Regions: Dynamics of Output per Capita following Peaks 134 Figure 4.5. Along Which Dimensions Has Emerging Market and Developing Economy Growth Improved? 135 Figure 4.6. Why Have Emerging Market and Developing Economies Become More Resilient? 136 Figure 4.7. Emerging Market and Developing Economies: Eects of Various Shocks on the Likelihood that an Expansion Will End 138 Figure 4.8. Emerging Market and Developing Economies: Eects of Policies on Expansion Duration and Speed of Recovery 140 Figure 4.9. Emerging Market and Developing Economies: Eects of Structural Characteristics on Expansion Duration and Speed of Recovery 141 Figure 4.10. Frequency of Various Types of Domestic and External Shocks to Emerging Market and Developing Economies 145 contents International Monetary Fund | October 2012 ix Figure 4.11. Policy Frameworks and Policy Space in Emerging Market and Developing Economies 146 Figure 4.12. Structural Characteristics of Emerging Market and Developing Economies 147 Figure 4.13. Contribution of Shocks, Policies, and Structure to the Length of Expansions in Emerging Market and Developing Economies 148 Figure 4.14. Emerging Market and Developing Economies: Eects of Changing the Autoregressive Model Coecients 154 Figure 4.15. Emerging Market and Developing Economy Subgroups: Dynamics of Output per Capita following Peaks 157 Figure 4.16. Emerging Market and Developing Economy Regions: Contributions of Shocks, Policies, and Structure to the Length of Expansions 158 Figure 4.1.1 Diverging Global Labor Market Trends, 2007–11 159 Figure 4.1.2. Distribution of Okun’s Law Coecients and Employment Responsiveness, 2007–11 161 Figure 4.1.3. Okun’s Law: Employment and Output in Emerging Market and Developing Economies 162 Figure 4.2.1. Composition of China’s Growth and Imports 164 Figure 4.2.2. Increasing Exports to China 165 Figure 4.2.3. Impact of an Investment Slowdown in China 166 Figure 4.3.1. e Resilience of Kenya and Tanzania 167 [...]... 2012 13 world economic outlook: Coping with High Debt and Sluggish Growth Figure 1.11 Risks to the Global Outlook Risks around the WEO projections have risen, consistent with market indicators, and remain tilted to the downside The oil price and inflation indicators point to downside risks to growth, while S&P 500 options prices and the term spread suggest some upside risk 1 Prospects for World GDP Growth. .. Israel, New Zealand, Norway, Russia, South Africa, Sweden, Switzerland, Turkey, United Kingdom, and Venezuela 2 For details on the construction of this indicator, see Kumar (2003) and Decressin and Laxton (2009) The indicator is expanded to include house prices 1 International Monetary Fund | October 2012 15 world economic outlook: Coping with High Debt and Sluggish Growth Figure 1.13 Upside and Downside... 2012 xvii world economic outlook: Coping with High Debt and Sluggish Growth systems and provide support to sovereigns, while national leaders must work toward true economic and monetary union This requires establishing a banking union with a unified financial stability framework and implementing measures toward fiscal integration, on the principle that more area-wide insurance must come with more area-wide... Central Bank; LTROs = Longer-term refinancing operations; AFME = Africa and Middle East 1JPMorgan EMBI Global Index spread 2 JPMorgan CEMBI Broad Index spread International Monetary Fund | October 2012 9 world economic outlook: Coping with High Debt and Sluggish Growth Figure 1.8 GDP Growth (Half-over-half annualized percent change) Real GDP growth is projected to move sideways or accelerate modestly in 2012... sovereigns, and were default nevertheless to occur, it must decrease the effects on creditors and on the 1VIX = Chicago Board Options Exchange Market Volatility Index; VStoxx = Bloomberg’s Euro Stoxx 50 Volatility Index International Monetary Fund | October 2012 xv world economic outlook: Coping with High Debt and Sluggish Growth financial system It is good to see these issues being seriously explored and. .. described in Matheson (2011) Within regions, countries are listed by economic size International Monetary Fund | October 2012 3 world economic outlook: Coping with High Debt and Sluggish Growth Figure 1.2 Euro Area Developments The crisis in the euro area has deepened Activity is contracting, mainly due to deep cutbacks in production in the periphery economies, because financial and fiscal conditions are... all International Monetary Fund | October 2012 11 world economic outlook: Coping with High Debt and Sluggish Growth Figure 1.9 Overheating Indicators for the G20 Economies Domestic overheating indicators point to ample slack in the advanced economies—most indicators flash blue By contrast, a number of yellow and red indicators for the emerging market and developing economies point to capacity constraints... 7 world economic outlook: Coping with High Debt and Sluggish Growth Figure 1.6 Recent Financial Market Developments Equity markets recently registered large losses and have been very volatile Policy pronouncements have had large effects Bank lending conditions are gradually easing from very tight levels in the United States but are continuing to tighten in the euro area U.S credit to households and. .. dashed lines indicate projected oil price in April 2012 WEO and current WEO International Monetary Fund | October 2012 5 world economic outlook: Coping with High Debt and Sluggish Growth Figure 1.4 Fiscal Policies In 2012, fiscal policy became more contractionary in the advanced economies It became much less contractionary in the emerging market and developing economies, where the fiscal deficit is expected... economies that have not suffered a financial crisis, notably in many emerging market and developing economies In these economies, high employment growth and solid consumption (Figure 1.3, panel 3) should continue to propel demand and, together with macroeconomic policy easing, support healthy investment and growth However, growth rates are not projected to return to precrisis levels •• In developing Asia, . WORLD ECONOMIC OUTLOOK October 2012 Coping with High Debt and Sluggish Growth International Monetary Fund World Economic and Financial Surveys ©2012. Account 207 world economic outlook: coping with high debt and SluggiSh growth vi International Monetary Fund | October 2012 Table A12. Emerging Market and Developing