Since our spring 2012 economic outlook, the crisis in the eurozone has worsened and growth in the emerging economies has fallen more than expected, with negative spillovers on the United States and Canada. Uncertainty about future policies and their effects remains pervasive and the risks to growth in the short term are still predominantly on the downside. Under the assumption that political compromises are achieved and major policy failures are avoided, advanced economies will experience subdued growth and emerging market economies (EMEs) a relatively robust expansion over the next two years, while commodity prices should remain at roughly current levels but experience greater volatility. The legacy effects of the financial crisis and recession continue to weigh on the global recovery through private-sector deleveraging and fiscal consolidation. However, a diminution of deleveraging, as private debt falls to more prudent levels relative to income and government deficits are contained, sets the stage for better growth in advanced economies around mid-decade.
Recent World Economy Dynamics
After a solid rebound in 2010, global growth faltered in 2011 and has fallen further in 2012, with the euro area experiencing an absolute decline in activity this year and the EMEs a marked slowdown in growth. Private-sector deleveraging and tight fiscal policy have contributed to hold back growth in advanced economies, as was to be expected in the wake of a severe financial crisis. In addition, the spillovers of the eurozone shock on global growth, the cooling impact of the 2010-11 tightening of monetary and credit policies in EMEs and, to a lesser extent, a rebound in oil prices from their recession lows have constituted important headwinds to the global recovery. Easier monetary policies in advanced economies and still solid growth in the EMEs have mitigated these adverse factors, but increasingly less so as the euro crisis has worsened and uncertainty about future policies and their effects has become more pervasive.
Recently, EMEs have eased their economic policies, the U.S. housing market has started improving, albeit from a very depressed level, and monetary policy in advanced economies has been further eased, including in the United States, where a new round of unconventional monetary policy (QE3) is being implemented, and in the eurozone, where a new sovereign bond-purchase program, conditional on a macroeconomic adjustment or precautionary program with the EFSF/ESM (European Financial Stability Fund/ European Stability Mechanism), is ready for implementation. In principle, all this should help stimulate domestic demand, employment and confidence, with positive effects on international trade and thus external demand. Nevertheless, considerable uncertainty persists about the viability of the eurozone (given the policies and reforms still needed to tackle its banking, fiscal and competitiveness...