IMF Research Department World Economic Outlook July 2014 Update An Uneven Global Recovery Continues IMF Research Department

Summary: The global recovery has continued, but at an uneven pace and downside risks remain. Continued policy effort key for more robust recovery Global growth decelerated more than expected in the first quarter of 2014 One-off factors in the U.S. economy (correction of earlier inventory buildup and bad weather) Growth also weaker in some major EMs, reflecting softer domestic demand Leading indicators suggest a rebound, but not strong enough to fully offset weak first quarter Forecast at 3.4 percent for 2014—0.3 percent weaker than April WEO—and unchanged at 4 percent for 2015 Downside risks still dominate the outlook Immediate risks stem from geopolitical tensions and potentially greater financial volatility Medium-term risk arise from prolonged period of subpar growth Policies should raise growth to its potential level, and to raise potential growth itself

Growth experienced a temporary setback in Q1, but should rebound in the rest of 2014-2015 Disappointing Q1 due to: Sharp correction to an earlier inventory buildup; and bad weather for the U.S. Softer-than-expected activity as policies tightened to cool credit and housing market in China Effects of geopolitical tensions in Russia Slower-than-expected growth in other EMs due to both weak external demand, and softer domestic demand Looking forward: Growth projected to rebound as temporary factors fade, and activity responds to recent easing measures (e.g., in China, ECB) GDP Growth (annualized quarterly percent change; dashed lines are from April 2014 WEO) Source: IMF, World Economic Outlook (July Update and April 2014 WEO). Source file: \\DATA1\WEO\PPT\2014\July_WEOUpdate\GDPGrowthCharts.xlsx (Angela Espiritu, mespiritu@imf.org). Speaking notes: growth fell from 3¾ percent in the second half of 2013 to 2¾ percent in the first Q of 2014—some ½ pp lower than expected at the time of the April WEO. Despite some countries surprising on the upside (Germany, Japan, UK, Spain), the overall effect was negative, mainly because of one-off factors but also because domestic demand in some major EMs was softer than anticipated. Specifically: >>In the United States, there was a sharp correction in the earlier inventory overhang and the effect of a harsh winter on demand. >> In China, domestic demand moderated more than expected, reflecting the authorities’ effort to rein in credit growth and a correction to real estate activity. >> Russia experienced setback in Q1 as geopolitical tensions further weakened demand on top of already weak investment. >>In other EMs, weaker-than-projected growth resulted both from weaker external demand, and, in a number of cases, softer domestic demand with weaker investment growth.

Leading indicators suggest that activity will pick up, but at a slow and uneven pace… World Trade, Industrial Production, and Manufacturing PMI (three-month moving average, annualized percent change) Sources: Haver Analytics; IMF, World Economic Outlook (July Update); Netherlands Bureau for Economic Policy Analysis for CPB trade volume index. Source file: \\DATA1\WEO\PPT\2014\July_WEOUpdate\World Trade, Industrial Production, and Manufacturing PMI.xlsx High frequency indicators such as IP and business confidence have picked up, but trade growth declined in early 2014, in line with the weaker-than-projected activity

..and with relatively soft investment growth Manufacturing PMI (three-month moving average; deviations from 50) Industrial Production (three-month moving average; annualized percent change) Real Gross Fixed Investment (annualized quarterly percent change) Sources: Haver Analytics, IMF, World Economic Outlook (July Update). Source file: \\DATA1\WEO\PPT\2014\July_WEOUpdate\World Trade, Industrial Production, and Manufacturing PMI.xlsx (Hao Jiang, hjiang@imf.org), \\DATA1\WEO\PPT\2014\July_WEOUpdate\PMI_Investment.xlsx (Angela Espiritu, mespiritu@imf.org). PMI in AEs strong at above 50, whereas somewhat weaker in EMs. Overall investment still weaker than seen before the global crisis

In advanced economies, financial conditions have continued easing since April 2014 although key interest rates are still higher than before May 2013 Key Interest Rates (percent) Equity Markets (national currency) Government Bond Yields (percent) May 22, 2013 May 22, 2013 Sources: Bloomberg (updated 7/21/2014); IMF, World Economic Outlook (July Update). Source file: EcOS sliced, EcOS\Databases\RES\WEO\CHT\Chapter 1\Chapter 1 Transformation and Charting Live\Reports\S2014 WEO\00_Updated\Figure 1_08 After the tightening in financial conditions experienced in AEs since the taper talks in May 2013, financial conditions have started easing further so since April 2014. Still, key interest rates, such as the 10 year US Treasury bond rate, and the long-term mortgage rate, are higher today than before last summer. For many stressed AEs in euro area, sovereign spreads have come down appreciably (although private lending rates are still high in some countries, reflecting persisting financial fragmentation) May 22, 2013 2010 11 12 13 June 14 2010 11 12 13 June 14 2010 11 12 13 June 14

EMs have also seen financial conditions ease since April, particularly with improved equity markets and capital flows Policy Rate (percent) Equity Markets (national currency) Net Flows in Emerging Market Funds (billions of U.S. dollars) May 22, 2013 June 29, 2012 May 22, 2013 1ST ECB LTROs Greek crisis Sources: Bloomberg (updated 7/21/2014); IMF, World Economic Outlook (July Update). Source file: EcOS sliced, EcOS\Databases\RES\WEO\CHT\Chapter 1\Chapter 1 Transformation and Charting Live\Reports\S2014 WEO\00_Updated\Figure 1_09 EMs have overall experienced an easing of financial conditions since April. Equity markets have bounced back or at least stabilized. Capital flows have recovered, and exchange rates have also stabilized or even strengthened. Some countries, where monetary policy was on a tightening trend before April, recently cut policy rates or kept them on hold Irish crisis May 22, 2013 2010 11 12 13 June 14 2010 11 12 13 June 14 2010 11 12 13 June 14

Overall, the key factors supporting growth are still in place Monetary policy still very accommodative in major advanced economies Financial market conditions also supportive, including lower sovereign spreads in financially stressed advanced economies in the euro area Fiscal consolidation will moderate appreciably in 2014-15 Growth in EMs will pick up on the back of higher external demand  

The outlook is thus for a continued recovery, but the pace is weak and uneven… WEO Real GDP Growth Projections (percent change from a year earlier) World U.S. Euro Area Japan Brazil Russia India China 2014 (July 2014) 3.4 1.7 1.1 1.6 1.3 0.2 5.4 7.4 (April 2014) 3.7 2.8 1.4 1.8 7.5 2015 4.0 3.0 1.5 2.0 1.0 6.4 7.1 2.7 2.3 7.3 Source: IMF, World Economic Outlook (July Update and April 2014 WEO). Source file: \\DATA1\WEO\PPT\2014\July_WEOUpdate\GDPGrowthCharts.xlsx (Angela Espiritu, mespiritu@imf.org). Growth to rebound as temporary factors fade, and activity responds to recent policy easing. For example, in China, measures such as tax relief for SMEs, accelerated fiscal and infrastructure spending and cuts in required reserve ratios for banks. The ECB cut its policy rate and introduced other easing measures in its June meeting Source: IMF, World Economic Outlook.

…and downside risks remain a concern Immediate risks Geopolitical risks, including that of an oil price hike In financial markets, risk of sharp rise in US long-term interest rates, or abrupt reversal in yield compression and EM capital inflows Real spillovers from worsened financial conditions in EMs Low inflation or price declines in the euro area Medium-term risks Stagnation in major advanced economies, and sub-par growth in many major EMs

In many advanced economies, lack of robust growth so far and still large output gaps point to subdued inflation in the near term. Thus, monetary policy should remain accommodative Output Gap (percent) Headline Inflation (year-over-year percent change; dashed lines are the six- to ten-year inflation expectation) Source: Consensus Economies (April 2014); Haver Analytics; IMF, World Economic Outlook (July Update). Source file: \\DATA1\WEO\PPT\2014\July_WEOUpdate\Inflation.xlsx (Angela Espiritu, mespiritu@imf.org). Output gaps are still large in most major AEs and expected to remain open in the next few years. Inflation pressures are absent and core inflation still below medium-term inflation targets (especially for the ECB). In Japan, inflation will pick up temporarily because of the effects of the recently increased consumption tax rate (April). Therefore, monetary policy should remain accommodative, and differences in the level of slack and inflation prospects will call for normalization to proceed at different speeds in different economies. To limit financial stability risks related to continued low interest rates, financial sector regulatory reforms should be completed and macroprudential tools developed further and implemented. 1/ The increase in inflation in 2014 reflects, to a large extent, the increase in the consumption tax.

In EMs current account and fiscal balances have weakened. Some major EMs have little policy space, and output gaps are small. Policy focus on lowering external vulnerability and structural reforms. All EMs Some Major EMs 1/ Sources: IMF, International Financial Statistics; IMF, World Economic Outlook (July Update). Source file: \\DATA1\WEO\PPT\2014\July_WEOUpdate\PolicySpace.xlsx (Angela Espiritu, mespiritu@imf.org). Although priorities are different across different EMDEs, one broadly common theme is that many are adjusting to weaker medium term growth prospects and slack is limited. At the same time, since summer of 2013, the external environment has become somewhat tighter. The priority for these EMs, under the baseline, is to use their exchange rates as a shock absorber, and address lingering inflation pressures and weaknesses in fiscal and current account balances. 1/ Brazil, Indonesia, India, Turkey, and South Africa.

To sum, stronger effort is needed everywhere for more robust global growth Advanced economies Maintain accommodative monetary policy, with normalization at different speeds Balance fiscal policy between short- and medium-term growth Complete financial regulatory reforms Develop and strengthen macroprudential measures EMDEs Manage volatility, and contain external vulnerability Allow exchange rate to adjust to external shocks Some countries need to contain fiscal imbalances and inflationary pressure Structural reforms to strengthen productivity, address infrastructure constraints and raise potential growth and/or make growth more sustainable All  

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