"Global growth is still in low gear and the drivers of growth are shifting, says the IMF’s latest World Economic Outlook (WEO) report. The IMF forecasts global growth to average 2.9 percent in 2013—below the 3.2 percent recorded in 2012—and to rise to 3.6 percent in 2014".
"Growth is expected to be driven by advanced economies. Growth in major emerging markets, although still strong, is expected to be weaker than the IMF forecast in its July WEO 2013 update. This is partly due to a natural cooling in growth following the stimulus-driven surge in activity after the Great Recession. Structural bottlenecks in infrastructure, labor markets, and investment have also contributed to slowdown in many emerging markets.
“This transition is leading to tensions, with emerging market economies facing both the challenge of slowing growth and changing global financial conditions,” said Olivier Blanchard, the IMF’s chief economist and head of the Research Department.
These growth transitions, combined with an approaching turning point in U.S. monetary policy, have led to new challenges and risks. In particular, long-term interest rates in the United States and many other economies have increased more than expected. Although the U.S. Federal Reserve recently decided to not slow the pace of its asset purchases yet and capital outflows from emerging markets have subsided somewhat, bond yields remain well above levels of early May. And there is a distinct risk that financial conditions will tighten from their current, still supportive levels.
In the United States, the projections are based on the key assumption that the ongoing shutdown in the federal government will be short-lived and the debt ceiling will be raised on time. Growth is expected to rise from 1½ percent this year to 2½ percent in 2014 driven by continued strength in private demand, a recovering housing market and a rising household wealth.
In the euro area, policy actions in general, have stabilized financial conditions, although growth in the periphery is still constrained by credit bottlenecks. The region is expected to gradually pull out of recession, with growth reaching 1 percent in 2014.
In Japan, fiscal stimulus and monetary easing under the authorities’ new policy package has enabled an impressive rebound in activity. But the expected unwinding of fiscal stimulus and reconstruction spending together with consumption tax hikes will lower growth from 2 percent this year to 1¼ percent in 2014.
In China, growth is projected to decelerate slightly from 7½ percent this year to 7¼ percent in 2014. Policymakers have refrained from stimulating activity amid concerns for financial stability and the need to support a more balanced and sustainable growth path.
Overall, growth in emerging market and developing economies is expected to remain strong at 4½–5 percent in 2013–14, supported by solid domestic demand, recovering exports, and supportive fiscal, monetary and financial conditions".
October 8, 2013.
By Rupa Duttagupta and Thomas Helbling
IMF Research Department