Financial Outlook 2013

Despite setbacks, an uneven global recovery continues. In advanced economies, the legacies of the pre- crisis boom and the subsequent crisis, including high private and public debt, still cast a shadow on the recovery. Emerging markets are adjusting to rates of economic growth lower than those reached in the pre- crisis boom and the postcrisis recovery. Overall, the pace of recovery is becoming more country specific.

Other elements are also affecting the outlook. Financial markets have been optimistic, with higher equity prices, compressed spreads, and very low volatility. However, this has not translated into a pickup in investment, which particularly in advanced economies has remained subdued. And there are concerns that markets are underpricing risk, not fully internalizing the uncertainties surrounding the macroeconomic outlook and their implications for the pace of withdrawal of monetary stimulus in some major advanced economies. Geopolitical tensions have risen. So far their macroeconomic effects appear mostly confined to the regions involved, but there are tangible risks of more widespread disruptions. Some medium-term problems that predate the crisis, such as the impact of an aging population on the labor force and weak growth in total factor productivity, are coming back to the fore and need to be tackled. These problems show up in low potential growth in advanced economies which may be affecting the pace of recovery today and a decline in potential growth in emerging markets. With world growth in the first half of 2014 slower than expected, global growth for 2014 is projected at 3.3 percent. The growth projection for 2015 is also slightly lower at 3.8 percent. These projections are predicated on the assumption that key drivers supporting the recovery in advanced economies including moderating fiscal consolidation (Japan being one exception) and highly accommodative monetary policy remain in place. Projections also assume a decline in geopolitical tensions, supporting some recovery in stressed economies. Growth prospects across both advanced economies and emerging markets exhibit sizable heterogeneity. Among advanced economies, growth is projected to pick up, but is slower in the euro area and Japan and generally faster in the United States and elsewhere. Among major emerging markets, growth is projected to remain high in emerging Asia, with a modest slowdown in China and a pickup in India, but to stay subdued in Brazil and Russia.

The pace of the global recovery has disappointed in recent years. With weaker-than-expected global growth for the first half of 2014 and increased downside risks, the projected pickup in growth may again fail to materialize or fall short of expectations. This further underscores that in most economies, raising actual and potential growth must remain a priority. In advanced economies, this will require continued support from monetary policy and fiscal adjustment attuned in pace and composition
to supporting both the recovery and long-term growth. In a number of economies, an increase in public infrastructure investment can support demand in the short term and help boost potential output in the medium term. In emerging markets, the scope for macroeconomic policies to support growth, if needed, varies across countries and regions, but space is limited in countries with external vulnerabilities. And in advanced economies as well as in emerging market and developing economies, there is a general, urgent need for structural reforms to strengthen growth potential or make growth more sustainable.

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