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

2. 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

3. 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,
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.

4. 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

5. ..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, \\DATA1\WEO\PPT\2014\July_WEOUpdate\PMI_Investment.xlsx (Angela Espiritu,
PMI in AEs strong at above 50, whereas somewhat weaker in EMs. Overall investment still weaker than seen before the global crisis

6. 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 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

7. 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

8. 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
Growth in EMs will pick up on the back of higher external demand

9. 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,
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.

10. …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

11. 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,
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.

12. 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,
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.

13. 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

14. Thank you