By Kathryn McConnell
The global economy is expected to grow a modest 3.3 percent in 2013 and a slightly improved 4 percent in 2014, the International Monetary Fund reports.
In its World Economic Outlook released April 16, the IMF warns that old dangers to advanced economies remain as new risks emerge. That means policymakers should not relax, according to the report, which came out in advance of the IMF’s joint meetings with the World Bank April 20–21 in Washington.
The organization said that while global economic recovery is gaining strength, it remains uneven. “Not all benefited to the same extent from the improved financial market conditions and confidence,” it stated in a press release. It said private demand in the United States has improved at a more rapid pace than in the euro area and projects that emerging markets and developing economies will grow at stronger rates than developed countries.
Growth in emerging markets is forecast to be 5.3 percent in 2013 and 5.7 percent in 2014, the IMF reports. Olivier Blanchard, the IMF’s chief economist, said the main challenge these countries face is handling capital flows to stem volatility. Attractive prospects in emerging economies and low interest rates in developed countries are likely to lead to more money going into emerging economies, he said. Activity in most of these economies has already picked up after a slowdown in 2012, thanks to resilient consumer demand, supportive macroeconomic policies, and revived exports, according to the report.
“Further progress calls for vigilance against macroeconomic imbalances and sustained structural reform,” the report states.
The IMF advises emerging markets to rein in excesses in their financial sectors and return fiscal balances to levels that include buffers to protect against potential downturns in the future.
Growth in the United States of 1.9 percent in 2013 and 3 percent the following year “is insufficient to make a large dent in a still very high unemployment rate, but it comes in the face of very strong, indeed an overly strong, fiscal consolidation of about 1.8 percent of GDP,” Blanchard said. Growth in demand also is getting stronger as credit and housing markets heal, the IMF reported.
Blanchard said the United States should focus on better fiscal consolidation now and a commitment to more consolidation in the future.
In the euro area, growth will be minus 0.3 percent in 2013 and just 1.1 percent in 2014. Blanchard said that while euro-area countries have made institutional progress over the years, borrowers still face interest rates that are too high to secure a recovery. In addition, credit channels in those countries are broken and better financial conditions are not yet being passed on to companies and households because banks are still restrained by poor profitability and low capital, the IMF reports. The exceptions are France and Germany, which have had long-standing strong fiscal policies.
In Japan, the recent fiscal and monetary stimulus is expected to drive a rebound, with growth reaching 1.6 percent in 2013 and 1.4 percent in 2014.
In South America, growth slowed in 2012, particularly in Brazil and Argentina, but growth is expected to pick up, Blanchard said. The slowdown has affected trade linkages in the region, noted Thomas Helbling, the IMF’s chief of world economic studies.
“A year ago, there were two very short-term tail risks. The first one was in the U.S. about fiscal policy, the fiscal cliff and the debt ceiling. But the other was the notion that the euro might not stay together,” Blanchard said.
Now, he continued, “we’re in a better place. We don’t have these short-term tail risks or high risks, but as I said, we’re not out of the woods.”