World Economic Outlook, September 2011 World Economic Outlook Slowing Growth, Rising Risks World Economic Outlook Slowing Growth, Rising Risks World Economic and Financial Surveys INTERNATIONAL MONETARY FUND 11 SEP IMF SEP 11 WORLD ECONOMIC OUTLOOK September 2011 Slowing Growth, Rising Risks International Monetary Fund World Economic and Financial Surveys ©2011 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 978-1-61635-119-9 Please send orders to: International Monetary Fund, Publication Services P.O. Box 92780, Washington, D.C. 20090, U.S.A. Tel.: (202) 623-7430 Fax: (202) 623-7201 E-mail: publications@imf.org www.imfbookstore.org International Monetary Fund | September 2011 iii Assumptions and Conventions ix Further Information and Data x Preface xi Foreword xiii Executive Summary xv Chapter 1. Global Prospects and Policies 1 Slowing Global Activity 1 Renewed Financial Instability 1 More Uneven Expansion 3 Economic Slack alongside Signs of Overheating 9 Risks Are Clearly to the Downside 11 Policy Challenges 19 National Perspectives on Policy Challenges 19 Multilateral Perspectives on Policy Challenges 27 Appendix 1.1. Commodity Market Developments and Prospects 32 References 66 Chapter 2. Country and Regional Perspectives 71 e United States: Weakening Again amid Daunting Debt Challenges 72 Europe: Enduring Economic and Financial Turbulence 76 Commonwealth of Independent States: Moderate Growth Performance 80 Asia: Securing a More Balanced Expansion 84 Latin America and the Caribbean: Moving toward More Sustainable Growth 88 Sub-Saharan Africa: Sustaining the Expansion 92 Middle East and North Africa: Growth Stalling amid Uncertainty 96 References 99 Chapter 3. Target What You Can Hit: Commodity Price Swings and Monetary Policy 101 Commodity Price Swings and Ination 104 Monetary Policy and Food Price Shocks: A Simulation-Based Perspective 110 Policy Implications for Responding to Commodity Price Shocks 118 Appendix 3.1. Economies in the Data Set 122 Appendix 3.2. Technical Appendix 122 References 132 CONTENTS WORLD ECONOMIC OUTLOOK: SLOWING GROWTH, RISING RISKS iv International Monetary Fund | September 2011 Chapter 4. Separated at Birth? The Twin Budget and Trade Balances 135 Estimating the Strength of the Twin Decits Link 137 Insights from Model-Based Simulations 145 Summary and Implications for the Outlook 151 Appendix 4.1 Data Construction and Sources 152 Appendix 4.2 Statistical Methodology, Robustness Checks, and Selected Additional Results on Export and Import Responses 153 Appendix 4.3 Global Integrated Monetary and Fiscal Model (GIMF) 156 References 159 Annex: IMF Executive Board Discussion of the Outlook, August 2011 161 Statistical Appendix 163 Assumptions 163 What’s New 164 Data and Conventions 164 Classication of Countries 165 General Features and Composition of Groups in the World Economic Outlook Classication 165 Table A. Classication by World Economic Outlook Groups and eir Shares in Aggregate GDP, Exports of Goods and Services, and Population, 2010 167 Table B. Advanced Economies by Subgroup 168 Table C. European Union 168 Table D. Emerging and Developing Economies by Region and Main Source of Export Earnings 169 Table E. Emerging and Developing Economies by Region, Net External Position, and Status as Heavily Indebted Poor Countries 170 Box A1. Economic Policy Assumptions Underlying the Projections for Selected Economies 172 List of Tables 177 Output (Tables A1–A4) 178 Ination (Tables A5–A7) 186 Financial Policies (Table A8) 192 Foreign Trade (Table A9) 193 Current Account Transactions (Tables A10–A12) 195 Balance of Payments and External Financing (Tables A13–A15) 202 Flow of Funds (Table A16) 206 Medium-Term Baseline Scenario (Table A17) 210 World Economic Outlook, Selected Topics 211 Boxes Box 1.1. Slow Recovery to Nowhere? A Sectoral View of Labor Markets in Advanced Economies 41 Box 1.2. Credit Boom-Bust Cycles: eir Triggers and Policy Implications 47 Box 1.3. Are Equity Price Drops Harbingers of Recession? 51 Box 1.4. Financial Investment, Speculation, and Commodity Prices 56 Box 1.5. External Liabilities and Crisis Tipping Points 61 Box 3.1. Ination in Sub-Saharan Africa during the 2008 Commodity Price Surge 125 Box 3.2. Food Price Swings and Monetary Policy in Open Economies 130 Box A1. Economic Policy Assumptions Underlying the Projections for Selected Economies 172 CONTENTS International Monetary Fund | September 2011 v CONTENTS Tables Table 1.1. Overview of the World Economic Outlook Projections 2 Table 1.2. Global Oil Demand and Production by Region 35 Table 1.2.1. What Triggers Credit Booms? 49 Table 1.3.1. Summary Statistics for Real Equity Price Growth 51 Table 1.3.2. Predicting New Recessions with Financial Market Variables 53 Table 1.5.1. Probit Estimates of Crisis Probability 63 Table 1.5.2. Model’s Predictive Power 64 Table 2.1. Selected Advanced Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment 75 Table 2.2. Selected European Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment 78 Table 2.3. Commonwealth of Independent States: Real GDP, Consumer Prices, Current Account Balance, and Unemployment 83 Table 2.4. Selected Asian Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment 85 Table 2.5. Selected Western Hemisphere Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment 91 Table 2.6. Selected Sub-Saharan African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment 95 Table 2.7. Selected Middle East and North African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment 99 Table 3.1. Gasoline Pass-through from Oil Prices 107 Table 3.2. Flour and Bread Pass-through from Wheat Prices 107 Table 3.1.1. Variations in Ination: Sub-Saharan Africa 127 Table 3.1.2. Food Ination Dynamics 128 Table 3.1.3. Ination Dynamics 129 Table 3.1.4. Macroeconomics Environment: Sub-Saharan Africa 129 Table 4.1. Data Sources 152 Table A1. Summary of World Output 178 Table A2. Advanced Economies: Real GDP and Total Domestic Demand 179 Table A3. Advanced Economies: Components of Real GDP 180 Table A4. Emerging and Developing Economies by Country: Real GDP 182 Table A5. Summary of Ination 186 Table A6. Advanced Economies: Consumer Prices 187 Table A7. Emerging and Developing Economies: Consumer Prices 188 Table A8. Major Advanced Economies: General Government Fiscal Balances and Debt 192 Table A9. Summary of World Trade Volumes and Prices 193 Table A10. Summary of Balances on Current Account 195 Table A11. Advanced Economies: Balance on Current Account 197 Table A12. Emerging and Developing Economies: Balance on Current Account 198 Table A13. Emerging and Developing Economies: Net Financial Flows 202 Table A14. Emerging and Developing Economies: Private Financial Flows 203 Table A15. Emerging and Developing Economies: Reserves 204 Table A16. Summary of Sources and Uses of World Savings 206 Table A17. Summary of Word Medium-Term Baseline Scenario 210 WORLD ECONOMIC OUTLOOK: SLOWING GROWTH, RISING RISKS vi International Monetary Fund | September 2011 Online Tables Table B1. Advanced Economies: Unemployment, Employment, and Real per Capita GDP Table B2. Emerging and Developing Economies: Real GDP Table B3. Advanced Economies: Hourly Earnings, Productivity, and Unit Labor Costs in Manufacturing Table B4. Emerging and Developing Economies: Consumer Prices Table B5. Summary of 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. Advanced Economies: Exchange Rates Table B9. Emerging and Developing Economies: General Government Net Lending/Borrowing and Overall Fiscal Balance Table B10. Emerging and Developing Economies: Broad Money Aggregates Table B11. Advanced Economies: Export Volumes, Import Volumes, and Terms of Trade in Goods and Services Table B12. Emerging and Developing Economies by Region: Total Trade in Goods Table B13. Emerging and Developing Economies by Source of Export Earnings: Total Trade in Goods Table B14. Advanced Economies: Current Account Transactions Table B15. Emerging and Developing Economies: Balances on Current Account Table B16. Emerging and Developing Economies by Region: Current Account Transactions Table B17. Emerging and Developing Economies by Analytical Criteria: Current Account Transactions Table B18. Summary of Balance of Payments, Financial Flows, and External Financing Table B19. Emerging and Developing Economies by Region: Balance of Payments and External Financing Table B20. Emerging and Developing Economies by Analytical Criteria: Balance of Payments and External Financing Table B21. Summary of External Debt and Debt Service Table B22. Emerging and Developing Economies by Region: External Debt by Maturity and Type of Creditor Table B23. Emerging and Developing Economies by Analytical Criteria: External Debt, by Maturity and Type of Creditor Table B24. Emerging and Developing Economies: Ratio of External Debt to GDP Table B25. Emerging and Developing Economies: Debt-Service Ratios Table B26. Emerging and Developing Economies, Medium-Term Baseline Scenario: Selected Economic Indicators Figures Figure 1.1. Global Indicators 3 Figure 1.2. Financial Strains in Europe and the United States 4 Figure 1.3. Recent Financial Market Developments 5 Figure 1.4. Prospects for Near-Term Activity 6 Figure 1.5. Global Outlook 7 Figure 1.6. Current and Forward-Looking Growth Indicators 8 Figure 1.7. Balance Sheets and Saving Rates 9 CONTENTS International Monetary Fund | September 2011 vii CONTENTS Figure 1.8. Emerging Market Conditions 10 Figure 1.9. Emerging Market Economies with Strong Credit Expansion 11 Figure 1.10. Measures of Monetary Policy and Liquidity in Selected Advanced and Emerging Market Economies 12 Figure 1.11. General Government Fiscal Balances and Public Debt 13 Figure 1.12. Cyclical Conditions 14 Figure 1.13. Global Projection Model Estimates of the Output Gap 15 Figure 1.14. Global Ination 16 Figure 1.15. Risks to the Global Outlook 17 Figure 1.16. WEO Downside Scenario 18 Figure 1.17. Overheating Indicators for the G20 Economies 22 Figure 1.18. Policy Requirements in Emerging Market Economies 23 Figure 1.19. External Developments 24 Figure 1.20. Global Imbalances 25 Figure 1.21. Employment and Unemployment 26 Figure 1.22. Drivers of Global Growth and Rebalancing 29 Figure 1.23. Commodity Prices 33 Figure 1.24. World Energy Market Developments 34 Figure 1.25. Developments in Base Metal Markets 38 Figure 1.26. Recent Developments in Markets for Major Food Crops 39 Figure 1.1.1. Trends in Employment and Labor Productivity 42 Figure 1.1.2. Sectoral Trends May Aect Potential Output Growth 44 Figure 1.1.3. Employment, Prots, and Intermediate Goods Trade in the United States 45 Figure 1.2.1. Credit Booms 47 Figure 1.3.1. Predicted Probability of a New Recession in a Quarter 54 Figure 1.4.1. Commodity Market Financialization 57 Figure 1.4.2. Commodity Price Volatility, 1990–2011 57 Figure 1.4.3. Commodity Futures Risk Premiums 59 Figure 1.5.1. Net Foreign Asset Indicators in the Run-up to External Crises 61 Figure 1.5.2. Model Estimate of Crisis Probabilities 64 Figure 2.1. Current Global Growth versus Precrisis Average 71 Figure 2.2. Output Gaps and Ination 72 Figure 2.3. United States and Canada: Current Growth versus Precrisis Average 73 Figure 2.4. United States: Struggling to Gain a Foothold 74 Figure 2.5. Europe: Current Growth versus Precrisis Average 77 Figure 2.6. Europe: An Uneven Performance and Elevated Risks 79 Figure 2.7. Commonwealth of Independent States: Current Growth versus Precrisis Average 81 Figure 2.8. Commonwealth of Independent States: A Gradual Recovery 82 Figure 2.9. Asia: Current Growth versus Precrisis Average 84 Figure 2.10. Asia: A Bright Spot in the World Economy 86 Figure 2.11. Latin America and the Caribbean: Current Growth versus Precrisis Average 89 Figure 2.12. Latin America: Maintaining the Growth Momentum 90 Figure 2.13. Sub-Saharan Africa: Current Growth versus Precrisis Average 93 Figure 2.14. Sub-Saharan Africa: Continued Strength 94 Figure 2.15. Middle East and North Africa: Current Growth versus Precrisis Average 97 Figure 2.16. Middle East and North Africa: Weakening Activity in an Uncertain Environment 98 Figure 3.1. World Commodity Prices, 2000–11 102 WORLD ECONOMIC OUTLOOK: SLOWING GROWTH, RISING RISKS viii International Monetary Fund | September 2011 Figure 3.2. World Commodity Prices, 1957–2011 104 Figure 3.3. Food Price Forecasts 105 Figure 3.4. Pass-through from World Ination to Domestic Ination 106 Figure 3.5. Variability of Real Domestic Prices 108 Figure 3.6. Share of Food in the Consumption Basket 109 Figure 3.7. Contribution of Food and Transportation to Headline Ination 110 Figure 3.8. Response of Ination Expectations to Ination Surprises 111 Figure 3.9. Pass-through from International to Domestic Food Price Ination 112 Figure 3.10. Response to a Food Price Shock in a Stylized Emerging and Developing Economy 115 Figure 3.11. Ination-Output Policy Frontier 116 Figure 3.12. Response to a Food Price Shock in a Stylized High-Credibility Emerging and Developing Economy 117 Figure 3.13. Response to a Food Price Shock in a Stylized Advanced Economy 118 Figure 3.14. One-Time versus Persistent Food Price Shocks 119 Figure 3.15. Response to a Food Price Shock amid Current Cyclical Conditions 120 Figure 3.1.1. Income and Food Share in Sub-Saharan Africa 125 Figure 3.1.2. Changes in Ination in Sub-Saharan Africa, 2007–08 126 Figure 3.1.3. Rice Price, Madagascar 127 Figure 3.2.1. Net Commodity Exporters, 2000–10 130 Figure 3.2.2. Net Commodity Importers, 2000–10 131 Figure 4.1. Incidence of Action-Based Fiscal Policy Changes by Year 139 Figure 4.2. Eects on the Current Account of a 1 Percent of GDP Fiscal Consolidation 141 Figure 4.3. Eects on Economic Activity of a 1 Percent of GDP Fiscal Consolidation 142 Figure 4.4. Eects on Saving and Investment of a 1 Percent of GDP Fiscal Consolidation 143 Figure 4.5. Eects on the Composition of Saving and Investment of a 1 Percent of GDP Fiscal Consolidation 144 Figure 4.6. Eects on Export and Import Volumes of a 1 Percent of GDP Fiscal Consolidation 145 Figure 4.7. Eects on Exchange Rates, Prices, and Interest Rates of a 1 Percent of GDP Fiscal Consolidation 146 Figure 4.8. Eects of a 1 Percent of GDP Fiscal Consolidation under Pegged and Nonpegged Exchange Rate Regimes 147 Figure 4.9. Eects of a 1 Percent of GDP Fiscal Consolidation under Constrained Monetary Policy: GIMF Simulations 148 Figure 4.10. Eects of a Synchronized Global 1 Percent of GDP Fiscal Consolidation: GIMF Simulations 149 Figure 4.11. Planned Fiscal Adjustment and the Current Account Impact: GIMF Simulations 150 Figure 4.12. Robustness: Eects on the Current Account of a 1 Percent of GDP Fiscal Consolidation 155 Figure 4.13. Eects on the Current Account of a 1 Percent of GDP Fiscal Policy Change 156 Figure 4.14. Fiscal Instruments and eir Eects on the Current Account 158 International Monetary Fund | September 2011 ix A number of assumptions have been adopted for the projections presented in the World Economic Outlook. It has been assumed that real eective exchange rates remained constant at their average levels during July 18–August 15, 2011, except for the currencies participating in the European exchange rate mechanism II (ERM II), which are assumed to have remained constant in nominal terms relative to the euro; that established policies of national authori- ties will be maintained (for specic assumptions about scal and monetary policies for selected economies, see Box A1 in the Statistical Appendix); that the average price of oil will be $103.20 a barrel in 2011 and $100.00 a barrel in 2012 and will remain unchanged in real terms over the medium term; that the six-month London interbank oered rate (LIBOR) on U.S. dollar deposits will average 0.4 percent in 2011 and 0.5 percent in 2012; that the three-month euro deposit rate will average 1.3 percent in 2011 and 1.2 percent in 2012; and that the six-month Japanese yen deposit rate will yield on average 0.5 percent in 2011 and 0.3 percent in 2012. ese are, of course, working hypoth- eses rather than forecasts, and the uncertainties surrounding them add to the margin of error that would in any event be involved in the projections. e estimates and projections are based on statistical information available through early September 2011. e following conventions are used throughout the World Economic Outlook: . . . to indicate that data are not available or not applicable; – between years or months (for example, 2010–11 or January–June) to indicate the years or months covered, including the beginning and ending years or months; / between years or months (for example, 2010/11) to indicate a scal or nancial year. “Billion” means a thousand million; “trillion” means a thousand billion. “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point). Data for Estonia are now included in the aggregates for the euro area and advanced economies. As in the April 2011 World Economic Outlook, WEO aggregated data exclude Libya for the projection years due to the uncertain political situation. Starting with the September 2011 World Economic Outlook, Guyana and Suriname are classied as members of the South America region and Belize as a member of the Central America region. Previously, they were members of the Caribbean region. For Sudan, the projections for 2011 and later exclude South Sudan. In gures and tables, shaded areas indicate IMF sta projections. If no source is listed on tables and gures, data are drawn from the WEO database. When countries are not listed alphabetically, they are ordered on the basis of economic size. Minor discrepancies between sums of constituent gures and totals shown reect rounding. As used in this report, the terms “country” and “economy” do not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis. Composite data are provided for various groups of countries organized according to economic characteris- tics or region. Unless otherwise noted, country group composites represent calculations based on 90 percent or more of the weighted group data. e boundaries, colors, denominations, and any other information shown on the maps do not imply, on the part of the International Monetary Fund, any judgment on the legal status of any territory or any endorse- ment or acceptance of such boundaries. ASSUMPTIONS AND CONVENTIONS [...]... 08 400 11: Q1 300 Sources: Haver Analytics; Organization for Economic Cooperation and Development; and IMF staff estimates 4This is consistent with evidence on recoveries from financial crises in Chapter 4 of the October 2009 World Economic Outlook International Monetary Fund | September 2011 9 world economic outlook: Slowing growth, riSing riSkS Figure 1.8 Emerging Market Conditions Equity prices in... pushed up sovereign risk premiums for Belgium, Italy, and Spain, and—to a much lesser extent—France (Figure International Monetary Fund | September 2011 1 world economic outlook: Slowing growth, riSing riSkS Table 1.1 Overview of the World Economic Outlook Projections (Percent change unless noted otherwise) Year over Year Difference from June 2011 WEO Projections 2011 2012 2009 2010 –0.7 –3.7 –3.5 –4.3... factor still points to the upside for output for both 2011 and 2012 Figure 1.15 Risks to the Global Outlook Risks to the outlook remain large, and downside risks dominate upside risks The probability of global growth below 2 percent is appreciably higher than in the April 2011 World Economic Outlook (WEO) Prospects for World GDP Growth1 (percent change) 5In this framework, a steepening yield curve... September 2011 5 world economic outlook: Slowing growth, riSing riSkS Figure 1.4 Prospects for Near-Term Activity The IMF staff’s Growth Tracker points to moderating growth in the very near term, while the Inflation Tracker suggests still elevated price pressure in several emerging market economies This reflects both high commodity prices and rising core inflation Growth Tracker1 Above trend and rising Above... accelerate their pace of deleveraging, by raising their saving rates further Given growing downside risks to U.S activity, the Federal Reserve should stand ready to deploy more unconventional support, and the pace of International Monetary Fund | September 2011 xv world economic outlook: Slowing Growth, Rising Risks fiscal consolidation could become more backloaded provided credible medium-term measures... continue to resist protectionist pressures Just as important, with negotiations on the long-running World Trade Organization (WTO) Doha Round of trade talks at a pivotal juncture, political leaders need to muster International Monetary Fund | September 2011 xvii world economic outlook: Slowing Growth, Rising Risks the will and high-level attention to devise a credible plan to move the negotiations forward,... Germany; EMA: emerging Asia; EUR: euro area excluding Germany; JPN: Japan; ROW: rest of the world; USA: United States 4 The U.S permanent measures shown in the figure are those planned in the president’s February budget proposal International Monetary Fund | September 2011 13 world economic outlook: Slowing growth, riSing riSkS Figure 1.12 Cyclical Conditions1 Output in major advanced economies has returned... methodology, three point to downside risks for growth and one points to upside risks for 2012 (Figure 1.15, middle panel): • Term spread: There is now a significant risk that the yield curve flattens in 2012, indicating downside risks to growth For 2011, the risks are roughly balanced, as they were in the April 2011 World Economic Outlook. 5 • Oil market: Oil-related risks through 2012 remain to the upside... banks and tight bank lending may have the same effect Weak banks and the potential need for International Monetary Fund | September 2011 xiii world economic outlook: Slowing Growth, Rising Risks more capital lead to more worry about fiscal stability Downside risks are very real I have been focusing so far on advanced economies The reason is that, until now, emerging market economies have been largely... Figure shows bank credit to the private sector 2For Argentina, calculations are based on official GDP and CPI data 3Right scale International Monetary Fund | September 2011 11 world economic outlook: Slowing growth, riSing riSkS Weak sovereign and banking sector balance sheets Figure 1.10 Measures of Monetary Policy and Liquidity in Selected Advanced and Emerging Market Economies (Percent unless noted . World Economic Outlook, September 2011 World Economic Outlook Slowing Growth, Rising Risks World Economic Outlook Slowing Growth, Rising Risks World. Risks World Economic and Financial Surveys INTERNATIONAL MONETARY FUND 11 SEP IMF SEP 11 WORLD ECONOMIC OUTLOOK September 2011 Slowing Growth, Rising Risks International