World Economic Outlook

Is the Tide Rising?

January 2014

1

Global activity has strengthened. Further improvements expected.

WEO Update in a nutshell

• Advanced economy growth has picked up

Robust private demand in the U.S.

Japan on the Abenomics wave

Euro area is turning the corner from recession to recovery

Growth spillovers to emerging market economies: exports have picked up

• Global growth is projected to strengthen in 2014-15, broadly as expected

• Weak and uneven recovery; downside risks remain

2

Global activity has strengthened, especially in advanced economies.

-5

0

5

10

15

20

2010 2011 2012 2013

PMI (Δ50, 3mma)

IP

CPB Trade Monitor

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

Sources: Markit Economics; Haver Analytics; Consensus Forecast; and IMF staff calculations. 3

Dec. 13

-4

-2

0

2

4

6

Jan. 2012 Jul. 12 Jan. 13 Jul. 13

Advanced Economies

Emerging Market Economies

Dec. 13

Manufacturing PMI (3mma, annualized percent change)

-5

0

5

10

15

Jan. 2012 Jul. 12 Jan. 13 Jul. 13

Advanced Economies

Emerging Market Economies

Nov. 13

Industrial Production (3mma, annualized percent change)

4

AE fiscal policy will be less tight in 2014, except in Japan.

Source: IMF staff estimates.

-1

-0.5

0

0.5

1

1.5

2

2.5

3

2010 11 12 13 14 15

Euro area United States Japan October 2013 WEO

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

4

0

200

400

600

800

1000

1200

1400

1600

2002 04 06 08 10 12 Jan. 14

United States BB

Sovereign 2/

Corporate 3/

Tighter U.S. monetary conditions interacted with EM domestic weaknesses and led to somewhat tighter EM funding conditions.

Interest Rate Spreads (basis points)

Net Capital Flows to Emerging Markets (billions of U.S. dollars; monthly flows)

5

May 22, 2013

Sources: Bloomberg, L.P.; EPFR Global/Haver Analytics; and IMF staff calculations. Note: ECB = European Central Bank; LTROs = longer-term refinancing operations.

1/ JPMorgan emerging market volatility index. 2/ JPMorgan EMBI Global Index spread. 3/ JPMorgan CEMBI Broad Index spread.

-30

-20

-10

0

10

20

30

2010:H1 10:H2 11:H1 11:H2 12:H1 12:H2 13:H1 Jan. 14

Bond

Equity

VXY 1/

Greek crisis

Irish crisis

1st ECB LTROs

June 29, 2012

May 22, 2013

With smaller capital inflows, exchange rates have been a shock absorber in many emerging market economies.

6

Nominal Exchange Rates (U.S. dollars per national currency; percent change from May 22, 2013 to January 17, 2014)

-20

-15

-10

-5

0

5

10

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

Percent Change from Dec. 18, 2013 to Jan. 17, 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.

In the BRICS, exports have picked up, but domestic demand has remained weak—consistent with tighter financial conditions and other weaknesses.

Sources: Haver Analytics; IMF staff calculations.

Real Fixed Capital Formation Growth (percent, y-o-y)

-30

-20

-10

0

10

20

30

40

2009 10 11 12 13 13: Q3

Brazil China India Russia South Africa

Real Exports Growth (percent, y-o-y)

-30

-20

-10

0

10

20

30

40

2009 10 11 12 13 13: Q3

Brazil China India Russia South Africa

7

0

50

100

150

200

250

300

1992 94 96 98 2000 02 04 06 08 10 12

Food

Metal

Energy

EM Terms of Trade (Index; 2000 = 100)

Commodity Prices (Index; 2005 = 100)

No boost from commodity prices. But no bust either. Downside risks to prices of some commodities 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. 8

Dec. 13

19

-5

0

5

10

15

20

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

China Contribution to Global GDP Growth (percent)

China GDP Growth (percent)

Growth in China is expected to stay around 7 percent. But

contribution to global growth remains substantial.

-0.5

0.0

0.5

1.0

1.5

2.0

-5

0

5

10

15

20

1963 68 73 78 83 88 93 98 2003 08 13 18

Contribution to Global Growth

PPP Share (Right scale)

Source: IMF staff estimates 9

World

U.S. Euro Area Japan Brazil Russia India China

2014 (Jan. 2014)

3.7 2.8 1.0 1.7 2.3 2.0 5.4 7.5

2014 (Oct. 2013)

3.6 2.6 1.0 1.2 2.5 3.0 5.1 7.7

2015 (Jan. 2014)

3.9 3.0 1.4 1.0 2.8 2.5 6.4 7.3

2015 (Oct. 2013)

4.0 3.4 1.4 1.1 3.2 3.5 6.3 7.6

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

Source: IMF, World Economic Outlook.

Global Activity is Projected to Strengthen

8

10

Evolution of Consensus Forecasts for Real GDP Growth in Advanced Economies (year-over-year percent change)

Downside risks remain. Forecasts upgrades for 2014 are recent, with much of the upward surprises reflecting inventory demand: Yet

another false dawn?

0

1

2

3

4

t-2 t-1 t

2012 2013 2014

Sources: Consensus Forecast; and IMF staff estimates.

11

U.S. Term Premium on 10-year Zero Coupon Bond

Tapering risks: The U.S. 10-year term premium could surprise on the upside

-2

-1

0

1

2

3

4

90 92 94 96 98 00 02 04 06 08 10 12

Sources: Kim and Wright (2005); and IMF staff calculations.

12

Jan. 14

Global aggregates: Headline Inflation (year-over-year percent change; dashed lines are the six-to-ten-year inflation expectations)

Inflation is projected to stay below target. Risks of deflation and

inflation expectations drifting down in advanced economies.

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

08 10 12 14

Emerging Market and Developing Economies

Euro area

Japan

United States

Sources: Consensus Forecast; and IMF staff estimates.

13

15: Q4

Euro area: banking union; structural & entitlement reforms; fiscal adjustment

Japan: work on all 3 arrows of Abenomics

US: address ST fiscal challenges; easy monetary policy; MT fiscal adjustment &

entitlement reforms

Policies

China: advance rebalancing and reform shadow banking

India: improve fiscal policy and remove structural bottlenecks

Brazil: raise domestic saving and foster private investment

Russia: rebuild fiscal buffers and improve the investment climate

EMDC: (i) exchange rate buffer; (ii) monetary policy to keep inflation well

anchored; cut rates if room exists; (iii) fiscal policy to be geared to MT

objectives; stimulate only if major slowdown threatens; (iv) preserve financial

stability; (v) structural reforms

14

14

BRICS

Sources: Haver Analytics; IMF staff calculations.

Real Fixed Capital Formation Growth (percent, y-o-y)

-30

-25

-20

-15

-10

-5

0

5

10

15

2009 10 11 12 13 13: Q3

Brazil China India Russia South Africa

Real GDP Growth (deviation from 1999-2006 average; q-o-q annualized)

-30

-20

-10

0

10

20

30

40

2009 10 11 12 13 13: Q3

Brazil China India Russia South Africa

15