Policy Actions Improve Prospects for Global Economy

IMF projects global growth at 3.3 percent in 2013, up to 4 percent in 2014

Recovery uneven in advanced economies; private demand in United States improving faster than in euro area

Developing, emerging economies persist in leading global growth

Global economic conditions have improved during the past six months. Advanced economy policymakers successfully defused two of the biggest short-term risks to global activity—the threat of a euro area breakup and a sharp fiscal contraction in the United States. Financial markets have rallied in response, and financial stability has improved, according to the IMF’s latest World Economic Outlook (WEO).

The report forecasts real global GDP growth of 3.3 percent on an annual average basis in 2013, about the same as the 3.2 percent growth seen in 2012, and the IMF expects growth to rise to 4 percent in 2014 (see table below). The WEO says the main reason behind the broadly unchanged growth prospects this year is that advanced economies have not all benefited to the same extent from the improved financial market conditions and confidence. Fiscal brakes in some countries were another important factor.

“We have moved from a two-speed recovery to a three-speed recovery,” said Olivier Blanchard, the IMF’s chief economist and director of the IMF’s Research Department, which prepares the WEO. “Emerging market and developing economies are still going strong, but in advanced economies, there appears to be a growing bifurcation between the United States on the one hand and the euro area on the other.”

• Private demand in the United States has been showing strength as credit and housing markets heal. But larger-than-expected fiscal adjustment is projected to keep real GDP growth to about 2 percent in 2013.

• In the euro area, real GDP is projected to contract by about ¼ percent this year before growing again in 2014. Credit channels are broken: better financial conditions are not yet passing through to companies and households because banks are still hobbled by poor profitability and low capital. Other brakes on growth in the euro area include continued fiscal adjustment, competitiveness problems, and balance sheet weaknesses.

• In Japan, new fiscal and monetary stimulus is expected to drive a rebound in activity, with real GDP growth reaching 1½ percent in 2013.

Over 2013–14, these divergences between advanced economies are projected to narrow. Assuming that policymakers deliver on their commitments, the latest...