Column: A fragile and uneven recovery

Jan 28 2014, 05:36 IST
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SummaryAnd we forecast growth in emerging market and developing economies to increase from 4.7% in 2013 to 5.1% in 2014.

The IMF’s January 2014 World Economic Outlook Update has three main messages: First, the recovery is strengthening. We forecast world growth to increase from 3% in 2013 to 3.7% in 2014. We forecast growth in advanced economies to increase from 1.3% in 2013 to 2.2% in 2014. And we forecast growth in emerging market and developing economies to increase from 4.7% in 2013 to 5.1% in 2014.

Second, this recovery was largely anticipated. We have revised our forecast for world growth in 2014 by just 0.1% relative to our October forecast. The basic reason behind the stronger recovery is that the brakes to the recovery are progressively being loosened. The drag from fiscal consolidation is diminishing. The financial system is slowly healing. Uncertainty is decreasing.

Third, it is still a weak and uneven recovery. Among advanced economies, it is stronger in the US than in Europe, stronger in the euro core than in Southern Europe. In most advanced economies, unemployment remains much too high. And downside risks remain.

The recovery is far from even. US growth appears increasingly solid. Private demand is strong. As a result of the December budget agreement, fiscal consolidation, which weighted on growth in 2013, will be more limited in 2014. These factors lead us to forecast 2.8% growth for 2014, compared to 1.9% in 2013. While monetary policy remains very accommodative, the focus is increasingly turning to monetary policy exit, and we expect the policy rate to rise in 2015.

Japan grew at 1.7% in 2013, and we forecast the same growth rate for 2014. This is good news. But this growth has come largely from fiscal stimulus and from exports. For growth to be sustained, consumption and investment have to take the relay. And the Japanese government will continue to face the challenge of achieving enough fiscal consolidation to reassure debt holders while not slowing down the recovery—a difficult challenge.

Conditions are increasingly favourable in the UK and the eurozone core nations. Public debts are on sustainable paths, and fiscal consolidation is, rightly, slowing down. Credit conditions are favourable. This leads us to predict growth of 2.4% for the UK, 1.6% for Germany, although only 0.9% for France, where confidence is still low.

Southern Europe continues to be the more worrisome part of the world economy. We forecast positive growth for 2014, but this growth is fragile. On the one hand, exports are strong. On the other hand, internal demand

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