Front Matter

Front Matter

International Monetary Fund. Research Dept.
Published Date:
October 2012
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©2012 International Monetary Fund

Cover and Design: Luisa Menjivar and Jorge Salazar

Composition: Maryland Composition

Cataloging-in-Publication Data

World economic outlook (International Monetary Fund)

World economic outlook : a survey by the staff of the International Monetary Fund.—Washington, DC : International Monetary Fund, 1980–

v. ; 28 cm.—(1981–1984: Occasional paper / International Monetary Fund, 0251-6365).—(1986–: World economic and financial surveys, 0256-6877)

Semiannual. Some issues also have thematic titles.

Has occasional updates, 1984–

1. Economic development—Periodicals. 2. Economic forecasting—Periodicals.

3. Economic policy—Periodicals. 4. International economic relations—Periodicals.

I. International Monetary Fund. II. Series: Occasional paper (International Monetary Fund).

III. Series: World economic and financial surveys.


ISBN 978-1-61635-389-6

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Assumptions and Conventions

A number of assumptions have been adopted for the projections presented in the World Economic Outlook. It has been assumed that real effective exchange rates remained constant at their average levels during July 30–August 27, 2012, except for the currencies participating in the European exchange rate mechanism II (ERM II), which are assumed to have remained constant in nominal terms relative to the euro; that established policies of national authorities will be maintained (for specific assumptions about fiscal and monetary policies for selected economies, see Box A1 in the Statistical Appendix); that the average price of oil will be $106.18 a barrel in 2012 and $105.10 a barrel in 2013 and will remain unchanged in real terms over the medium term; that the six-month London interbank offered rate (LIBOR) on U.S. dollar deposits will average 0.7 percent in 2012 and 0.6 percent in 2013; that the three-month euro deposit rate will average 0.6 percent in 2012 and 0.2 percent in 2013; and that the six-month Japanese yen deposit rate will yield on average 0.4 percent in 2012 and 0.3 percent in 2013. These are, of course, working hypotheses rather than forecasts, and the uncertainties surrounding them add to the margin of error that would in any event be involved in the projections. The estimates and projections are based on statistical information available through mid-September 2012.

The following conventions are used throughout the World Economic Outlook:

  • … to indicate that data are not available or not applicable;
  • – between years or months (for example, 2011–12 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
  • / between years or months (for example, 2011/12) to indicate a fiscal or financial year.
  • “Billion” means a thousand million; “trillion” means a thousand billion.
  • “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

For Cyprus, data reflect a passive scenario based on implementation of approved policies only. It is also assumed that the government will be able to roll over its debt and finance its deficit at a reasonable cost over the medium term and that banks will achieve adequate capitalization without government assistance.

Data for South Sudan are now included in the sub-Saharan Africa aggregates and classified under those for a country with fuel as the main source of export earnings. Sudan, which remains in the Middle East and North Africa region, is now classified as a country with nonfuel primary products as the main source of export earnings.

Data for San Marino are now included in the advanced economy classification.

As in the April 2012 World Economic Outlook, data for Syria are excluded for 2011 and later due to the uncertain political situation.

Starting with the October 2012 World Economic Outlook, the label for the Emerging and Developing Economies group is Emerging Market and Developing Economies. The member countries remain unchanged with the exception of South Sudan as a new member of the group.

If no source is listed on tables and figures, data are drawn from the World Economic Outlook (WEO) database.

When countries are not listed alphabetically, they are ordered on the basis of economic size.

Minor discrepancies between sums of constituent figures and totals reflect rounding.

As used in this report, the terms “country” and “economy” do not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.

Composite data are provided for various groups of countries organized according to economic characteristics or region. Unless otherwise noted, country group composites represent calculations based on 90 percent or more of the weighted group data.

The boundaries, colors, denominations, and any other information shown on the maps do not imply, on the part of the International Monetary Fund, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries.

Further Information and Data

This version of the World Economic Outlook is available in full through the IMF eLibrary ( and the IMF website ( Accompanying the publication on the IMF website is a larger compilation of data from the WEO database than is included in the report itself, including files containing the series most frequently requested by readers. These files may be downloaded for use in a variety of software packages.

The data appearing in the World Economic Outlook are compiled by the IMF staff at the time of the WEO exercises. The historical data and projections are based on the information gathered by the IMF country desk officers in the context of their missions to IMF member countries and through their ongoing analysis of the evolving situation in each country. Historical data are updated on a continual basis as more information becomes available, and structural breaks in data are often adjusted to produce smooth series with the use of splicing and other techniques. IMF staff estimates continue to serve as proxies for historical series when complete information is unavailable. As a result, WEO data can differ from other sources with official data, including the IMF’s International Financial Statistics.

The WEO data and metadata provided are “as is” and “as available,” and every effort is made to ensure, but not guarantee, their timeliness, accuracy, and completeness. When errors are discovered, there is a concerted effort to correct them as appropriate and feasible. Corrections and revisions made after publication are incorporated into the electronic editions available from the IMF eLibrary ( and on the IMF website ( All substantive changes are listed in detail in the online tables of contents.

For details on the terms and conditions for usage of the WEO database, please refer to the IMF Copyright and Usage website,

Inquiries about the content of the World Economic Outlook and the WEO database should be sent by mail, fax, or online forum (telephone inquiries cannot be accepted):

World Economic Studies Division

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Fax: (202) 623-6343

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The analysis and projections contained in the World Economic Outlook are integral elements of the IMF’s surveillance of economic developments and policies in its member countries, of developments in international financial markets, and of the global economic system. The survey of prospects and policies is the product of a comprehensive interdepartmental review of world economic developments, which draws primarily on information the IMF staff gathers through its consultations with member countries. These consultations are carried out in particular by the IMF’s area departments—namely, the African Department, Asia and Pacific Department, European Department, Middle East and Central Asia Department, and Western Hemisphere Department—together with the Strategy, Policy, and Review Department; the Monetary and Capital Markets Department; and the Fiscal Affairs Department.

The analysis in this report was coordinated in the Research Department under the general direction of Olivier Blanchard, Economic Counsellor and Director of Research. The project was directed by Jörg Decressin, Deputy Director, Research Department, and by Thomas Helbling, Division Chief, Research Department.

The primary contributors to this report are Abdul Abiad, John Bluedorn, Rupa Duttagupta, Jaime Guajardo, Andrea Pescatori, Damiano Sandri, John Simon, and Petia Topalova. Other contributors include Ashvin Ahuja, Ali Alichi, Peter Allum, Derek Anderson, Michal Andrle, Samya Beidas-Strom, Olivier Blanchard, Stijn Claessens, Davide Furceri, Nick Gigineishvili, Benjamin Hunt, Joong Shik Kang, M. Ayhan Kose, Douglas Laxton, Daniel Leigh, Prakash Loungani, Junior Maih, Akito Matsumoto, Dimitre Milkov, Armando Morales, Malhar Nabar, Marina Rousset, Marco E. Terrones, and Kenichi Ueda.

Hites Ahir, Gavin Asdorian, Shan Chen, Angela Espiritu, Sinem Kilic Celik, Nadezhda Lepeshko, Murad Omoev, Ezgi O. Ozturk, Katherine Pan, Daniel Rivera-Greenwood, Jair Rodriguez, Marina Rousset, Min Kyu Song, and Bennet Voorhees provided research assistance. Kevin Clinton provided comments and suggestions. Tingyun Chen, Mahnaz Hemmati, Toh Kuan, Rajesh Nilawar, Emory Oakes, and Steve Zhang provided technical support. Skeeter Mathurin and Luke Lee were responsible for word processing. Linda Griffin Kean of the External Relations Department edited the manuscript and coordinated the production of the publication. External consultants Amrita Dasgupta, Aleksandr Gerasimov, Shamiso Mapondera, Nhu Nguyen, and Pavel Pimenov provided additional technical support.

The analysis has benefited from comments and suggestions by staff from other IMF departments, as well as by Executive Directors following their discussion of the report on September 14, 2012. However, both projections and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to their national authorities.


The recovery continues, but it has weakened. In advanced economies, growth is now too low to make a substantial dent in unemployment. And in major emerging market economies, growth that had been strong earlier has also decreased. Relative to our April 2012 forecasts, our forecasts for 2013 growth have been revised from 2.0 percent down to 1.5 percent for advanced economies, and from 6.0 percent down to 5.6 percent for emerging market and developing economies.

The forces at work are, for the most part, familiar.

Those forces pulling growth down in advanced economies are fiscal consolidation and a still-weak financial system. In most countries, fiscal consolidation is proceeding according to plan. While this consolidation is needed, there is no question that it is weighing on demand, and the evidence increasingly suggests that, in the current environment, the fiscal multipliers are large. The financial system is still not functioning efficiently. In many countries, banks are still weak, and their positions are made worse by low growth. As a result, many borrowers still face tight borrowing conditions.

The main force pulling growth up is accommodative monetary policy. Central banks continue not only to maintain very low policy rates, but also to experiment with programs aimed at decreasing rates in particular markets, at helping particular categories of borrowers, or at helping financial intermediation in general.

More seems to be at work, however, than these mechanical forces—namely, a general feeling of uncertainty. Assessing the precise nature and effects of this uncertainty is essential, but it is not easy. Essential: If uncertainty could be decreased, the recovery could well turn out to be stronger than currently forecast. But not easy: Explicit indexes of uncertainty, such as the VIX in the United States or the VStoxx in Europe, remain at fairly low levels.1 Uncertainty appears more diffuse, more Knightian in nature. Worries about the ability of European policymakers to control the euro crisis and worries about the failure to date of U.S. policymakers to agree on a fiscal plan surely play an important role, but one that is hard to nail down.

Low growth and uncertainty in advanced economies are affecting emerging market and developing economies, through both trade and financial channels, adding to homegrown weaknesses. As was the case in 2009, trade channels are surprisingly strong, with, for example, lower exports accounting for most of the decrease in growth in China. Alternative risk-off and risk-on episodes, triggered by progress and regress on policy action, especially in the euro area, are triggering volatile capital flows.

Turning to policy action, the main focus continues to be the euro area. Here, there has been a clear change in attitudes, and a new architecture is being put in place. The lessons of the past few years are now clear. Euro area countries can be hit by strong, country-specific, adverse shocks. Weak banks can considerably amplify the adverse effects of such shocks. And, if it looks like the sovereign itself might be in trouble, sovereign-bank interactions can further worsen the outcome.

Therefore a new architecture must aim at reducing the amplitude of the shocks in the first place—at putting in place a system of transfers to soften the effects of the shocks. That architecture must aim at moving the supervision, the resolution, and the recapitalization processes for banks to the euro area level. It must decrease the probability of default by sovereigns, and were default nevertheless to occur, it must decrease the effects on creditors and on the financial system. It is good to see these issues being seriously explored and to see some of these mechanisms being slowly put together.

In the short term, however, more immediate measures are needed. Spain and Italy must follow through with adjustment plans that reestablish competitiveness and fiscal balance and maintain growth. To do so, they must be able to recapitalize their banks without adding to their sovereign debt. And they must be able to borrow at reasonable rates. Most of these pieces are falling into place, and if the complex puzzle can be rapidly completed, one can reasonably hope that the worst might be behind us.

If uncertainty is indeed behind the current slowdown, and if the adoption and implementation of these measures decrease uncertainty, things may turn out better than our forecasts, not only in Europe, but also in the rest of the world. I, for once, would be happy if our baseline forecasts turn out to be inaccurate—in this case, too pessimistic.

Olivier Blanchard

Economic Counsellor


1VIX = Chicago Board Options Exchange Market Volatility Index; VStoxx = Bloomberg’s Euro Stoxx 50 Volatility Index.

Executive Summary

The recovery has suffered new setbacks, and uncertainty weighs heavily on the outlook. A key reason is that policies in the major advanced economies have not rebuilt confidence in medium-term prospects. Tail risks, such as those relating to the viability of the euro area or major U.S. fiscal policy mistakes, continue to preoccupy investors. The World Economic Outlook (WEO) forecast thus sees only a gradual strengthening of activity from the relatively disappointing pace of early 2012. Projected global growth, at 3.3 and 3.6 percent in 2012 and 2013, respectively, is weaker than in the July 2012 WEO Update, which was in turn lower than in the April 2012 WEO (Chapter 1). Output is expected to remain sluggish in advanced economies but still relatively solid in many emerging market and developing economies. Unemployment is likely to stay elevated in many parts of the world. And financial conditions will remain fragile, according to the October 2012 Global Financial Stability Report (GFSR). Chapter 2 discusses regional developments in detail.

The WEO forecast rests on two crucial policy assumptions. The first is that European policymakers—consistent with the GFSR’s baseline scenario—will adopt policies that gradually ease financial conditions further in periphery economies. In this regard, the European Central Bank (ECB) has recently done its part. It is now up to national policymakers to move and activate the European Stability Mechanism (ESM), while articulating a credible path and beginning to implement measures to achieve a banking union and greater fiscal integration. The second assumption is that U.S. policymakers will prevent the drastic automatic tax increases and spending cutbacks (the “fiscal cliff”) implied by existing budget law, raise the U.S. federal debt ceiling in a timely manner, and make good progress toward a comprehensive plan to restore fiscal sustainability. The WEO forecast could once again be disappointed on both accounts.

More generally, downside risks have increased and are considerable. The IMF staff’s fan chart, which uses financial and commodity market data and analyst forecasts to gauge risks—suggests that there is now a 1 in 6 chance of global growth falling below 2 percent, which would be consistent with a recession in advanced economies and low growth in emerging market and developing economies. Ultimately, however, the WEO forecast rests on critical policy action in the euro area and the United States, and it is very difficult to estimate the probability that this action will materialize.

This juncture presents major difficulties for policymakers. In many advanced economies, injections of liquidity are having a positive impact on financial stability and output and employment, but the impact may be diminishing. Many governments have started in earnest to reduce excessive deficits, but because uncertainty is high, confidence is low, and financial sectors are weak, the significant fiscal achievements have been accompanied by disappointing growth or recessions. In emerging market and developing economies, policymakers are conscious of the need to rebuild fiscal and monetary policy space but are wondering how to calibrate policies in the face of major external downside risks.

An effective policy response in the major advanced economies is the key to improving prospects and inspiring more confidence about the future. In the short term, the main tasks are to rule out the tail risk scenarios and adopt concrete plans to bring down public debt over the medium term.

The crisis in the euro area remains the most obvious threat to the global outlook. The ECB has put in place a mechanism to improve the transmission of low policy rates to borrowing costs in the periphery, where investors’ fears about the viability of the euro have pushed market rates to very high levels. The periphery economies need to continue to adjust. Governments must meet their commitment to make the euro area firewall more flexible. Specifically, the ESM must intervene in banking systems and provide support to sovereigns, while national leaders must work toward true economic and monetary union. This requires establishing a banking union with a unified financial stability framework and implementing measures toward fiscal integration, on the principle that more area-wide insurance must come with more area-wide control. Unless more action is taken soon, recent improvements in financial markets could prove fleeting. The WEO forecast may then be disappointed once again, and the euro area could slide into the October 2012 GFSR weak policies scenario. If, however, policy actions were to exceed WEO assumptions—for example, if euro area policymakers were to deliver a major down payment on the road to more integration, such as an area-wide bank resolution mechanism with a common fiscal backstop—real GDP growth could well be higher than projected, consistent with the October 2012 GFSR complete policies scenario.

Reducing the risks to the medium-term outlook presaged by the public debt overhang in the major advanced economies will require supportive monetary policies and appropriate structural reforms (Chapter 3), as well as careful fiscal policy. Good progress has already been made and planned fiscal consolidation is sizable for the near term, as discussed in the October 2012 Fiscal Monitor. U.S. legislators must soon remove the threat of the fiscal cliff and raise the debt ceiling—if they fail to do so, the U.S. economy could fall back into recession, with deleterious spillovers to the rest of the world. Furthermore, policymakers in the United States urgently need to specify strong medium-term fiscal plans. Those in Japan need to persevere with planned adjustments and specify new measures to halt and soon reverse the increase in the public-debt-to-GDP ratio.

More generally, policymakers need to specify realistic fiscal objectives and develop plans for contingencies. This means adopting structural or cyclically adjusted targets, or anchoring plans on measures and their estimated yields, rather than on nominal targets. Automatic stabilizers should be allowed to play freely. Also, should growth fall significantly short of WEO projections, countries with room to maneuver should smooth their planned adjustment over 2013 and beyond. At the same time, declining inflation rates, growing slack, and sizable fiscal adjustment in the advanced economies argue for maintaining very accommodative monetary conditions, including unconventional measures because interest rates are near the zero lower bound.

So far, policymakers’ record in meeting structural challenges has been mixed; therefore, further efforts are needed. Programs to relieve chronic household debt burdens, where these have been tried, have not been commensurate with the scale of the problem. Efforts to strengthen the regulatory framework for financial institutions and markets have been patchy, according to Chapter 3 of the October 2012 GFSR, with some success in rebuilding capital but less in lowering reliance on wholesale funding and containing incentives for excessive risk taking and regulatory arbitrage. In addition, in the euro area, the restructuring or resolution of weak financial institutions has advanced slowly and only in response to major market pressure—a more proactive, area-wide approach is urgently needed. Increases in statutory retirement ages have reduced the long-term path of pension outlays, but as health care spending continues to increase quickly, more measures will be needed to contain the growth of entitlements to a sustainable rate. Some countries, notably the economies of the euro area periphery, have introduced reforms to make labor markets more flexible. However, many economies need to take stronger action to help the long-term unemployed, including through improvements to job-search support and training.

In emerging market and developing economies, activity has been slowed by policy tightening in response to capacity constraints, weaker demand from advanced economies, and country-specific factors. Policy improvements have raised their resilience to shocks (Chapter 4). Since the crisis erupted in 2008, expansionary policies have buffered the negative impact of the weakness in advanced economy markets: fiscal deficits have typically been above precrisis levels, whereas real interest rates have been lower. Domestic credit has grown rapidly. Over the medium term, policymakers will need to ensure that they retain the ability to respond flexibly to shocks by maintaining a sound fiscal position and by keeping inflation and credit growth at moderate rates. In this respect, the policy tightening during 2011 was appropriate. Given the growing downside risks to external demand, central banks have appropriately paused or reversed some of the monetary policy tightening. Many have scope to do more to support demand if external downside risks threaten to materialize.

Global imbalances, and the associated vulnerabilities, have diminished, but there is still a need for more decisive policy action to address them. Within the euro area, current account imbalances—the large surpluses in Germany and the Netherlands and the deficits in most periphery economies—need to adjust further. At the global level, the current account positions of the United States, the euro area as a whole, and Japan are weaker than they would be with more sustainable fiscal policies—and the real effective exchange rates of the dollar, euro, and yen are stronger. In contrast, the current account positions of many Asian economies are undesirably strong and their exchange rates undesirably weak. In part, this reflects distortions that hold back consumption. But it also reflects the effect of large-scale official accumulation of foreign exchange.

In general, the policies required to lower current account imbalances and related vulnerabilities suit the interests of the economies concerned. More adjustment in external-deficit economies and more internal demand in external-surplus economies would contribute not only to a safer global economy but also to stronger growth for all. Many external-deficit economies need further fiscal adjustment and strengthened financial sector supervision and regulation. These efforts need to be complemented with structural measures, the details of which differ widely across the external-deficit advanced and emerging market economies but include labor and product market reform, improvements to governance and the business environment, and measures to boost private saving for retirement. The structural measures needed in external-surplus economies with undervalued exchange rates also vary by country but include boosting investment in Germany, reforming the social safety net in China to encourage consumption, and reducing the accumulation of official reserves in many emerging market economies, which would also help rein in high credit and asset price growth.

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