WORLD ECONOMIC OUTLOOK: GROWTH SLOWDOWN, PRECARIOUS RECOVERY Figure 1. 19. Policy Uncertainty and Trade Tensions Figure 1.20. Geopolitical Risk Index Index (Index) ertainty remains elevated, notwithstanding a decline in High geopolitical risk complicates the outlook. Arab Spi Syrian and actions escalation Libyan wars ea 250 300 50 200- 12131415161718Feb Source: Caldara and lacoviello(2018) Jan. Apr. Jul. Oct. Jan. Apr Islamic State. The Caldara and lacoviello Geopolitical Risk index 201616161617 171818181819 mated text-search results of the electronic archives of 11 national and newspapers. The index is calculated by counting the number of Source: Baker, Bloom, and Davis(2016). to geopolitical risk in each newspaper for each month (as a share Note: The Baker-Bloom-Davis index of Global Economic Policy Uncertainty(GEPU) Imber of news articles), and normalized to average a value of 100 in decade a gDP-weighted average of national EPU indices for 20 Brazil, Canada, Chile, China, France, Germany Korea, Mexico, the Netherlands, Russia, Spain, Sweden, the United Kingdom, ar he United States. Mean of global economic policy uncertainty index from 1997to 2015= 100; mean of Us trade policy uncertainty index from 1985 to 2010=100 east Asia(Figures 1. 19 and 1.20; see also see Box 1.5 of the October 2018 WEO). These risk factors in olation may not have a strong impact on investment and growth beyond the countries directly affected, reduce future policy space, and raise downside risks to but a sequence of such events--combined with trade edium-term growth tensions and tighter global financial conditions-could Other financial vulnerabilities: Cyberattacks on finan- have outsize effects on sentiment that reverberate on a cial infrastructure are another source of risk because broader scale they can severely disrupt cross-border payment systems Medium-term risks: Risks of a somewhat and the How of goods and services. As noted in the slower-moving nature with serious im April 2019 GFSR, wide-ranging reversals of postcrisis the medium-and long-term outlook include perv regulatory reform or a continuation of still relatively effects of climate change and a decline in trust with accommodative financial conditions could foster addi egard to establishment institutions and political par- tional financial vulnerabilities, especially if financial ties. The Intergovernmental Panel on Climate Change intermediaries intensify their search for returns in an (IPCC) reported in October 2018 that, at current environment of slower global growth rates of increase, global warming could reach 1.5C Political uncertainty: a host of other potential factors above preindustrial levels between 2030 and 2052, add downside risk to global investment and growth bringing with it extremes of temperate ecipitatio These include policy uncertainty about the agenda of nd drought. Such extremes would have devastator ministrations or surrounding elections, ge humanitarian effects ar ICt severe, persistent political conflict in the Middle East, and tensions in output losses across a broad range of economies Intemational Monetary Fund April 2019
20 WORLD ECONOMIC OUTLOOK: Growth Slowdown, Precarious Recovery International Monetary Fund | April 2019 reduce future policy space, and raise downside risks to medium-term growth. Other financial vulnerabilities: Cyberattacks on financial infrastructure are another source of risk because they can severely disrupt cross-border payment systems and the flow of goods and services. As noted in the April 2019 GFSR, wide-ranging reversals of postcrisis regulatory reform or a continuation of still relatively accommodative financial conditions could foster additional financial vulnerabilities, especially if financial intermediaries intensify their search for returns in an environment of slower global growth. Political uncertainty: A host of other potential factors add downside risk to global investment and growth. These include policy uncertainty about the agenda of new administrations or surrounding elections, geopolitical conflict in the Middle East, and tensions in east Asia (Figures 1.19 and 1.20; see also see Box 1.5 of the October 2018 WEO). These risk factors in isolation may not have a strong impact on investment and growth beyond the countries directly affected, but a sequence of such events—combined with trade tensions and tighter global financial conditions—could have outsize effects on sentiment that reverberate on a broader scale. Medium-term risks: Risks of a somewhat slower-moving nature with serious implications for the medium- and long-term outlook include pervasive effects of climate change and a decline in trust with regard to establishment institutions and political parties. The Intergovernmental Panel on Climate Change (IPCC) reported in October 2018 that, at current rates of increase, global warming could reach 1.5°C above preindustrial levels between 2030 and 2052, bringing with it extremes of temperature, precipitation, and drought. Such extremes would have devastating humanitarian effects and inflict severe, persistent output losses across a broad range of economies Global economic policy uncertainty (PPP weight) US trade policy uncertainty (right scale) Figure 1.19. Policy Uncertainty and Trade Tensions (Index) Source: Baker, Bloom, and Davis (2016). Note: The Baker-Bloom-Davis index of Global Economic Policy Uncertainty (GEPU) is a GDP-weighted average of national EPU indices for 20 countries: Australia, Brazil, Canada, Chile, China, France, Germany, Greece, India, Ireland, Italy, Japan, Korea, Mexico, the Netherlands, Russia, Spain, Sweden, the United Kingdom, and the United States. Mean of global economic policy uncertainty index from 1997 to 2015 = 100; mean of US trade policy uncertainty index from 1985 to 2010 = 100. PPP = purchasing power parity. Global economic policy uncertainty remains elevated, notwithstanding a decline in US trade policy uncertainty. Jan. 2016 Apr. 16 Jul. 16 Oct. 16 Jan. 17 Apr. 17 Jul. 17 Oct. 17 Jan. 18 Apr. 18 Jul. 18 Oct. 18 Feb. 19 100 150 200 250 300 350 400 0 100 200 300 400 500 600 Figure 1.20. Geopolitical Risk Index (Index) Source: Caldara and Iacoviello (2018). Note: ISIS = Islamic State. The Caldara and Iacoviello Geopolitical Risk index reflects automated text-search results of the electronic archives of 11 national and international newspapers. The index is calculated by counting the number of articles related to geopolitical risk in each newspaper for each month (as a share of the total number of news articles), and normalized to average a value of 100 in the 2000–09 decade. 0 50 100 150 200 250 300 2010 11 12 13 14 15 16 17 18 Feb. 19 Arab Spring: Syrian and Libyan wars Syrian civil war escalation Russian actions in Crimea ISIS escalation Paris attacks High geopolitical risk complicates the outlook
CHAPTER 1 GLOBAL PROSPECTS AND POLICIES ( Chapter 3 of the October 2017 WEO). The Figure 1.21. Risks to the Global Outlook from the IpCc comes amid substantial distrust of establishment institutions and mainstream political The balance of risks to the outlook has shifted downward relative to the April 2018 parties-a distrust often born of rising inequality and World Economic Outlook entrenched beliefs that existing economic arrangements 6-1. Prospects for World GDP Growth do not work for all. Th e accompa anying polarization of views and growing appeal of extreme policy plat forms imperil the medium-term outlook by making it 4- WEO baseline difficult to implement structural reforms for boosting potential output growth and strengthening resilient percent confidence interval cluding against climate-related risks 70 percent confidence interval Fan chart analysis: Fan chart analysis-based on 1-.---90 percent confidence interval from April 2018 WEO equity and commodity market data and the dispersion of in ation and term spread projections of private forecasters--shows a downward shift in the balance of 2.0-2 Balance of Risks Associated with Selected Risk Factors2 risks relative to the April 2018 WEO(Figure 1.21) (Coefficient of skewness expressed in units of the The worsening profile mostly reflects the anticipated variables) drag associated with the risk of oil prices rebounding sharply from their recent rapid drop. As discussed in the April 2019 GFSR, growth-at-risk analysis suggests slightly higher near-term downside risks to Balance of risks for global financial stability compared with those in the October 2018 report and continued elevated risks to lext year 15一 S&P500 lation risk oil market risks Dispersion of Forecasts and Implied volatility 3 Policy Priorities: Enhance Resilience, Raise Medium-Term Growth Prospects -GDP (right scale)-1.2 Term spread The modest projected pickup in global economic ext year relies to easing of macroeconomic strains in currently stressed 40 emerging market and developing economies and on 0650 avoiding a sharp slowdown in advanced economies 04 0.2 In this context, avoiding policy missteps that could harm economic activity should be the main priority. 0u11100 0.0 Macroeconomic and financial policy should 20060810121416Fe 20060810 guard against further deceleration where output ma fall below potential and to ensure a soft landing where Sources: Bloomberg Finance LP. Chicago Board Options Exchange (CBOE) policy support needs to be withdrawn. At the national art shows the uncertainty around the april 2019 World Economic level, monetary policy should aim to keep inflation Outlook(WEO)central forecast with 50, 70, and 90 percent confidence intervals. on track toward the central banks target(and, where the so pe cent confidence interval n tue the o ansd 7e per cent intervals see it is on target, to ensure that it stabilizes there)and to Appendix 1.2 of the April 2009 WEO for details. The 90 percent intervals for the keep infation expectations anchored. Fiscal policy will current-year and one-year-ahead forecasts from the April 2018 WEO are shown need to manage trade-offs between supporting demand variables. The values for inflation risks and oil market risks enter with the opposite and ensuring that public debt remains on a sustain- sign since they represent downside risks to growth able path. In particular, where fiscal consolidation is growth forecasts for the Group of Seven economies(Canada, France, Germany, needed, policy should calibrate its pace to secure stabil- Italy, Japan, United Kingdom, United States), Brazil, China, India, and Mexico. VIX is the CBOE Standard Poor's(S&P)500 Im ity without suppressing near-term growth and harmin g measures the average dispersion of term spreads implicit in interest rate forecasts programs that protect the vulnerable(see the April any, Japan, th 2019 Fiscal Monitor). Financial sector policies can crude oil volatility index Forecasts are from Consensus Economics survey Dashed lines represent the average values from 2000 to the present. International Monetary Fund April 2019
21 CHAPTER 1 Glob al Prospects and Policies International Monetary Fund | April 2019 (Chapter 3 of the October 2017 WEO). The warning from the IPCC comes amid substantial distrust of establishment institutions and mainstream political parties—a distrust often born of rising inequality and entrenched beliefs that existing economic arrangements do not work for all. The accompanying polarization of views and growing appeal of extreme policy platforms imperil the medium-term outlook by making it difficult to implement structural reforms for boosting potential output growth and strengthening resilience, including against climate-related risks. Fan chart analysis: Fan chart analysis—based on equity and commodity market data and the dispersion of inflation and term spread projections of private forecasters—shows a downward shift in the balance of risks relative to the April 2018 WEO (Figure 1.21). The worsening profile mostly reflects the anticipated drag associated with the risk of oil prices rebounding sharply from their recent rapid drop. As discussed in the April 2019 GFSR, growth-at-risk analysis suggests slightly higher near-term downside risks to global financial stability compared with those in the October 2018 report and continued elevated risks to medium-term growth. Policy Priorities: Enhance Resilience, Raise Medium-Term Growth Prospects The modest projected pickup in global economic growth next year relies to an important extent on the easing of macroeconomic strains in currently stressed emerging market and developing economies and on avoiding a sharp slowdown in advanced economies. In this context, avoiding policy missteps that could harm economic activity should be the main priority. Macroeconomic and financial policy should aim to guard against further deceleration where output may fall below potential and to ensure a soft landing where policy support needs to be withdrawn. At the national level, monetary policy should aim to keep inflation on track toward the central bank’s target (and, where it is on target, to ensure that it stabilizes there) and to keep inflation expectations anchored. Fiscal policy will need to manage trade-offs between supporting demand and ensuring that public debt remains on a sustainable path. In particular, where fiscal consolidation is needed, policy should calibrate its pace to secure stability without suppressing near-term growth and harming programs that protect the vulnerable (see the April 2019 Fiscal Monitor). Financial sector policies can GDP (right scale) VIX Term spread (right scale) Oil Balance of risks for Current year Next year 50 percent confidence interval 70 percent confidence interval 90 percent confidence interval 90 percent confidence interval from April 2018 WEO 2. Balance of Risks Associated with Selected Risk Factors2 (Coefficient of skewness expressed in units of the underlying variables) 3. 4. 1. Prospects for World GDP Growth1 (Percent change) Sources: Bloomberg Finance L.P.; Chicago Board Options Exchange (CBOE); Consensus Economics; Haver Analytics; and IMF staff estimates. 1 The fan chart shows the uncertainty around the April 2019 World Economic Outlook (WEO) central forecast with 50, 70, and 90 percent confidence intervals. As shown, the 70 percent confidence interval includes the 50 percent interval, and the 90 percent confidence interval includes the 50 and 70 percent intervals. See Appendix 1.2 of the April 2009 WEO for details. The 90 percent intervals for the current-year and one-year-ahead forecasts from the April 2018 WEO are shown. 2 The bars depict the coefficient of skewness expressed in units of the underlying variables. The values for inflation risks and oil market risks enter with the opposite sign since they represent downside risks to growth. 3 GDP measures the purchasing-power-parity-weighted average dispersion of GDP growth forecasts for the Group of Seven economies (Canada, France, Germany, Italy, Japan, United Kingdom, United States), Brazil, China, India, and Mexico. VIX is the CBOE Standard & Poor’s (S&P) 500 Implied Volatility Index. Term spread measures the average dispersion of term spreads implicit in interest rate forecasts for Germany, Japan, the United Kingdom, and the United States. Oil is the CBOE crude oil volatility index. Forecasts are from Consensus Economics surveys. Dashed lines represent the average values from 2000 to the present. 0 1 2 3 4 5 6 2016 17 18 19 20 0 25 50 75 100 125 0.0 0.2 0.3 0.5 0.6 2006 08 10 12 14 16 Feb. 19 Figure 1.21. Risks to the Global Outlook –1.5 –1.0 –0.5 0.0 0.5 1.0 1.5 2.0 Term spread S&P 500 Inflation risk Oil market risks 0 10 20 30 40 50 60 70 80 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 2006 08 10 12 14 16 Feb. 19 Dispersion of Forecasts and Implied Volatility3 WEO baseline The balance of risks to the outlook has shifted downward relative to the April 2018 World Economic Outlook
WORLD ECONOMIC OUTLOOK: GROWTH SLOWDOWN, PRECARIOUS RECOVERY balance sheets and address vulnerabilities proactively by fiscal policy should emphasize measures that boost c complement these efforts by securing gth of policy trained on countercyclical demand manageme deploying macroprudential tools, such as countercycli- potential output and raise inclusiveness, while main- cal capital buffers or targeted sectoral capital buffers(or taining public finances on a sustainable path. In the igher risk weights and provisions on such exposures) absence of a major deceleration of growth, countries and developing, where needed, borrower-based tools to where public debt is high should pursue gradual fiscal mitigate risks stemming from high debt vulnerabilities. consolidation that avoids sharp drags on growth and This will enhance resilience to a potentially more vol- secures adequate social insurance for the vulnerable. If atile environment in global asset markets(as discussed there are clear signs of a substantially deeper and more in greater detail in the April 2019 GFSR) protracted slowdown, monetary and fiscal policy would If the current slowdown turns more severe and eed to become more accommodative. further safe protracted than envisaged in the baseline, the macro- guarding financial systems-including through raising economic policy stance should become more accom- bank capital and liquidity buffers, enhancing macro- s dative, particularly where output already is or could prudential oversight of nonbank financial institutions, below potential and where there is policy space. If developing macroprudential tools as needed, and fiscal policy is on a consolidation path and monetary avoiding a rollback of postcrisis regulatory reforms- policy is constrained, its pace would have to slow to remains vital in the context of continued monetary ensure adequate support for near-term demand. Where policy accommodation a weaker outlook and worsening market sentiment The modest medium-term outlook for the group reinforce each other, the need for clear communication (potential output growth rates are estimated in the and cooperative efforts to tackle unresolved issues- range of 0.5-1.5 percent for most advanced econo- such as the US-China trade dispute and Brexit-will mies)calls for measures to raise labor force partici- en more pressing pation rates and productivity growth. These include Beyond 2020, the forecast of broadly stable growth public investment(coupled with incentives to raise at 3. 6 percent, despite major subregions and key private spending as needed) in infrastructure, lifelong economies slowing over the medium term, relies to an learning and workforce skills, and research and devel important extent on weights shifting toward those with opment. Protecting dynamism--by ensuring that com- relatively higher growth rates. Boosting medium-term petition policy frameworks facilitate new firm entry rowth prospects remains a priority for most advanced and curb incumbents abuse of market power--remai economies. A policy priority for several emerging mar- vital when a few big firms are cornering increasingly ket and developing economies continues to be a stron- larger market shares across technology, retail, financial revenue base for needed social and infrastructure services, and other sectors in many advanced econo- ending. Sustained poverty reduction and increased mies(Chapter 2 documents trends in market power inclusiveness, as well as debt sustainability, depend on across advanced economies and their macroeconomic it. A second cross-cutting theme is the need to ensure that the gains benefit all segments of society through In the United States, even though output is already adequate social spending on education, health, and above potential, the Federal Reserve's patient approach safety net policies that protect the vulnerable.( Box 1.3 to normalization is appropriate, considering the documents a related set of challenges stemming from uncertainty around the baseline and muted inflation persistent spatial disparities in labor market outcomes The path of the policy interest rate should depend on incoming data, the economic outlook, and risks Under the WEO baseline projection, labor markets are expected to tighten further and wage growth to Advanced Economies-Policy Priorities pick up, likely warranting a further rate hike in the Among advanced economies, consumer price inflation second half of the year. Rapid tightening could weaken generally remains below target, and wage pressures infation expectations and activity, while delayed relatively subdued (although picking up in a few cases). tightening could contribute to financial vulnerabilities Monetary policy should stay accommodative in these and a sharper downturn down the road. The 2017 tax economies until inflation starts showing clear signs of overhaul and subsequent increases in spending hay rising toward central banks' targets. With monetary widened the fiscal deficit and added to an already Intemational Monetary Fund April 2019
22 WORLD ECONOMIC OUTLOOK: Growth Slowdown, Precarious Recovery International Monetary Fund | April 2019 complement these efforts by securing the strength of balance sheets and address vulnerabilities proactively by deploying macroprudential tools, such as countercyclical capital buffers or targeted sectoral capital buffers (or higher risk weights and provisions on such exposures) and developing, where needed, borrower-based tools to mitigate risks stemming from high debt vulnerabilities. This will enhance resilience to a potentially more volatile environment in global asset markets (as discussed in greater detail in the April 2019 GFSR). If the current slowdown turns more severe and protracted than envisaged in the baseline, the macroeconomic policy stance should become more accommodative, particularly where output already is or could fall below potential and where there is policy space. If fiscal policy is on a consolidation path and monetary policy is constrained, its pace would have to slow to ensure adequate support for near-term demand. Where a weaker outlook and worsening market sentiment reinforce each other, the need for clear communication and cooperative efforts to tackle unresolved issues— such as the US–China trade dispute and Brexit—will become even more pressing. Beyond 2020, the forecast of broadly stable growth at 3.6 percent, despite major subregions and key economies slowing over the medium term, relies to an important extent on weights shifting toward those with relatively higher growth rates. Boosting medium-term growth prospects remains a priority for most advanced economies. A policy priority for several emerging market and developing economies continues to be a stronger revenue base for needed social and infrastructure spending. Sustained poverty reduction and increased inclusiveness, as well as debt sustainability, depend on it. A second cross-cutting theme is the need to ensure that the gains benefit all segments of society through adequate social spending on education, health, and safety net policies that protect the vulnerable. (Box 1.3 documents a related set of challenges stemming from persistent spatial disparities in labor market outcomes and productivity within countries.) Advanced Economies—Policy Priorities Among advanced economies, consumer price inflation generally remains below target, and wage pressures are relatively subdued (although picking up in a few cases). Monetary policy should stay accommodative in these economies until inflation starts showing clear signs of rising toward central banks’ targets. With monetary policy trained on countercyclical demand management, fiscal policy should emphasize measures that boost potential output and raise inclusiveness, while maintaining public finances on a sustainable path. In the absence of a major deceleration of growth, countries where public debt is high should pursue gradual fiscal consolidation that avoids sharp drags on growth and secures adequate social insurance for the vulnerable. If there are clear signs of a substantially deeper and more protracted slowdown, monetary and fiscal policy would need to become more accommodative. Further safeguarding financial systems—including through raising bank capital and liquidity buffers, enhancing macroprudential oversight of nonbank financial institutions, developing macroprudential tools as needed, and avoiding a rollback of postcrisis regulatory reforms— remains vital in the context of continued monetary policy accommodation. The modest medium-term outlook for the group (potential output growth rates are estimated in the range of 0.5–1.5 percent for most advanced economies) calls for measures to raise labor force participation rates and productivity growth. These include public investment (coupled with incentives to raise private spending as needed) in infrastructure, lifelong learning and workforce skills, and research and development. Protecting dynamism—by ensuring that competition policy frameworks facilitate new firm entry and curb incumbents’ abuse of market power—remains vital when a few big firms are cornering increasingly larger market shares across technology, retail, financial services, and other sectors in many advanced economies (Chapter 2 documents trends in market power across advanced economies and their macroeconomic implications). In the United States, even though output is already above potential, the Federal Reserve’s patient approach to normalization is appropriate, considering the uncertainty around the baseline and muted inflation. The path of the policy interest rate should depend on incoming data, the economic outlook, and risks. Under the WEO baseline projection, labor markets are expected to tighten further and wage growth to pick up, likely warranting a further rate hike in the second half of the year. Rapid tightening could weaken inflation expectations and activity, while delayed tightening could contribute to financial vulnerabilities and a sharper downturn down the road. The 2017 tax overhaul and subsequent increases in spending have widened the fiscal deficit and added to an already
CHAPTER 1 GLOBAL PROSPECTS AND POLICIES unsustainable US public debt profile. Fiscal policy tIons should focus on raising the revenue-to-GDP ratio priately differentiated across member countries, can with greater reliance on indirect taxes to counteract engthen the area-wide impact. Completing he anticipated rise in aging-related spending. Regard- banking union and continuing the cleanup of balance financial sector policies, the current risk-based sheets remain vital for strengthening credit intermedi tion, s ation in some economies. Structural reform priorities should be preserved(and strengthened in the case of vary according to country-specific needs. In france, nonbank financial institutions) to counteract vuln efforts to reduce corporate administrative burdens, ability from weaker corporate credit underwriting promote innovation, and strengthen competition in standards, rising corporate leverage, and emerging the services sector would complement steps taken cybersecurity threats. Improving medium-term growth to improve labor market fexibility and boost poten- prospects will require incentivizing greater labor force tial growth. In Italy, measures to decentralize wage participation and enhancing workforce skills bargaining would help align wages and labor pro- In the United Kingdom, despite the historically ductivity, thereby enhancing labor market Flexibility low unemployment rate and a recent pickup in wage and boosting employment growth. In Spain, efforts growth, the uncertainty surrounding Brexit nego to reduce labor market duality would support job tiations calls for a cautious, data-dependent mone- creation and incentivize private investment tary response. Similarly, the envisaged pace of fiscal In Japan, sustained monetary accommodation will olidation, anchored by the objective of be necessary to lift inflation expectations and the cyclically adjusted public sector deficit to below toward the central banks target. Fiscal policy should be 2 percent of gDP by 2020-21, should be adjusted geared toward ensuring long-term fiscal sustainability if growth slows materially Structural reforms should while protecting growth. The coupling of the planned focus on improving infrastructure quality and boost October increase in the consumption tax rate with fis- ng the basic skills of high school graduates, and labor cal measures to support near-term activity is welcome market policies should ensure a smooth redeployment A sustainable debt trajectory calls for further gradual of workers to expanding sectors from those negatively and steady increases in the consumption tax rate and affected after Breit reforms of the social security framework. The success of In the euro area, core inflation continues to remain the broad Abenomics agenda of reflating the econom well below target and wage growth relatively sluggish depends crucially on also lifting productivity growth despite labor markets tightening in many econo- and wage inflation, for which reducing labor market mies in the currency zone. Monetary policy should continue to remain accommodative. In this regard, emains vital. Durably counteracting the aging-induced the forward guidance from the European Central decline in labor force growth will require, among other Bank that it will reinvest maturing securities until initiatives, further raising female labor force supply and well after the first interest rate hikes is welcome encouraging more use of foreign labor Fiscal space varies across the currency area. In some countries(france, Italy, Spain), buffers should be rebuilt gradually to avoid reigniting adverse feed Emerging Market and Developing Economies- back spirals between sovereign and bank risks and Policy Priorities to secure stability. In Germany, where growth has The variation in performance across emerging been slowing, the available fiscal space can be used market and developing economies in the recent past to increase public investment in physical and human n a context of volatile external conditions has high capital or reduce the labor tax wedge--measures that lighted the importance of policy frameworks oriented would boost potential output and help with external toward securing growth prospects and strengthening of the resilience. Monetary policy should focus on anchoring essential if the current weakness in activity persists inflation expectations where inflation high f a severe downside scenario were to materialize in recent currency depreciations threaten pass-through the euro area, available monetary policy tools could domestic prices. Where expectations are well anchored, be complemented with fiscal easing by countries that monetary policy can support domestic activity as have appropriate fiscal space and financing condi- eeded(see Chapter 3 of the October 2018 WEO) International Monetary Fund April 2019
23 CHAPTER 1 Glob al Prospects and Policies International Monetary Fund | April 2019 unsustainable US public debt profile. Fiscal policy should focus on raising the revenue-to-GDP ratio, with greater reliance on indirect taxes to counteract the anticipated rise in aging-related spending. Regarding financial sector policies, the current risk-based approach to regulation, supervision, and resolution should be preserved (and strengthened in the case of nonbank financial institutions) to counteract vulnerability from weaker corporate credit underwriting standards, rising corporate leverage, and emerging cybersecurity threats. Improving medium-term growth prospects will require incentivizing greater labor force participation and enhancing workforce skills. In the United Kingdom, despite the historically low unemployment rate and a recent pickup in wage growth, the uncertainty surrounding Brexit negotiations calls for a cautious, data-dependent monetary response. Similarly, the envisaged pace of fiscal consolidation, anchored by the objective of narrowing the cyclically adjusted public sector deficit to below 2 percent of GDP by 2020–21, should be adjusted if growth slows materially. Structural reforms should focus on improving infrastructure quality and boosting the basic skills of high school graduates, and labor market policies should ensure a smooth redeployment of workers to expanding sectors from those negatively affected after Brexit. In the euro area, core inflation continues to remain well below target and wage growth relatively sluggish despite labor markets tightening in many economies in the currency zone. Monetary policy should continue to remain accommodative. In this regard, the forward guidance from the European Central Bank that it will reinvest maturing securities until well after the first interest rate hikes is welcome. Fiscal space varies across the currency area. In some countries (France, Italy, Spain), buffers should be rebuilt gradually to avoid reigniting adverse feedback spirals between sovereign and bank risks and to secure stability. In Germany, where growth has been slowing, the available fiscal space can be used to increase public investment in physical and human capital or reduce the labor tax wedge—measures that would boost potential output and help with external rebalancing. Prompt adoption of these measures is essential if the current weakness in activity persists. If a severe downside scenario were to materialize in the euro area, available monetary policy tools could be complemented with fiscal easing by countries that have appropriate fiscal space and financing conditions. A synchronized fiscal response, albeit appropriately differentiated across member countries, can strengthen the area-wide impact. Completing the banking union and continuing the cleanup of balance sheets remain vital for strengthening credit intermediation in some economies. Structural reform priorities vary according to country-specific needs. In France, efforts to reduce corporate administrative burdens, promote innovation, and strengthen competition in the services sector would complement steps taken to improve labor market flexibility and boost potential growth. In Italy, measures to decentralize wage bargaining would help align wages and labor productivity, thereby enhancing labor market flexibility and boosting employment growth. In Spain, efforts to reduce labor market duality would support job creation and incentivize private investment. In Japan, sustained monetary accommodation will be necessary to lift inflation expectations and progress toward the central bank’s target. Fiscal policy should be geared toward ensuring long-term fiscal sustainability while protecting growth. The coupling of the planned October increase in the consumption tax rate with fiscal measures to support near-term activity is welcome. A sustainable debt trajectory calls for further gradual and steady increases in the consumption tax rate and reforms of the social security framework. The success of the broad Abenomics agenda of reflating the economy depends crucially on also lifting productivity growth and wage inflation, for which reducing labor market duality to increase productivity of nonregular workers remains vital. Durably counteracting the aging-induced decline in labor force growth will require, among other initiatives, further raising female labor force supply and encouraging more use of foreign labor. Emerging Market and Developing Economies— Policy Priorities The variation in performance across emerging market and developing economies in the recent past in a context of volatile external conditions has highlighted the importance of policy frameworks oriented toward securing growth prospects and strengthening resilience. Monetary policy should focus on anchoring inflation expectations where inflation remains high or recent currency depreciations threaten pass-through to domestic prices. Where expectations are well anchored, monetary policy can support domestic activity as needed (see Chapter 3 of the October 2018 WEO)
WORLD ECONOMIC OUTLOOK: GROWTH SLOWDOWN, PRECARIOUS RECOVERY Tighter external financial conditions can expose near-term growth slowdown that could derail the vulnerabilities related to high public debt as well overarching reform agenda, some centrally financed as balance sheet maturity and currency mismatches on-budget fiscal expansion in 2019 may be appropri- accumulated during years of ultralow interest rates ate. It should avoid large-scale infrastructure stimulus alysis of the fiscal implications of potentially tighter households so as to lower poverty and inec (see Box 1. I of the April 2019 Fiscal Monitor for an nd instead emphasize targeted transfers to low-income financial conditions in emerging market economies). (Box 1. 2 of the April 2019 Fiscal Momiorality Fiscal policy should ensure that debt ratios remain In India, continued implementation of structural sustainable, which would also contain borrowing costs and financial sector reforms with efforts to reduce and create space to combat downturns. Improving the public debt remain essential to secure the economy's targeting of subsidies, rationalizing recurrent expen- growth prospects. In the near term, continued fiscal ditures, and mobilizing revenue can help preserve consolidation is needed to bring down Indias elevated apital outlays needed to boost potential growth and public debt. This should be supported by strength the social spending that improves inclusion. In some ening goods and services tax compliance and further cases. reducing subsidies. Important steps have been taken frameworks will have to be strengthened to deal with to strengthen financial sector balance sheets, includ high private debt burdens, rein in excess credit growth, ing through accelerated resolution of nonperforming and contain balance sheet currency and maturity assets under a simplified bankruptcy framework. These mismatches. Exchange rate flexibility can complement efforts should be reinforced by enhancing governance these policies by helping to buffer shocks. It can also of public sector banks. Reforms to hiring and dis help prevent persistent misalignments of relative prices missal regulations would help incentivize job creation that lead to resource misallocation and the buildup of and absorb the country's large demographic dividend financial imbalances. Across all economies. reforms to efforts should also be enhanced on land reform to ensure sustainable, inclusive growth remain essential, facilitate and expedite infrastructure development particularly given that the medium-term prospects In Argentina, projections for growth have bee for per capita growth are relatively subdued for many revised upward, and higher nominal wages and rising economies in this group nation expectations are expected to generate more In China, the economy's reliance on credit has persistent inflationary pressures in 2019 than projected declined somewhat following regulatory efforts to in the October 2018 WEO. Downside risks to the rein in shadow banking and control the buildup of economy remain sizable, the materialization of which debt. Despite recent weaker momentum stemming could lead to a shift in investor preferences away from from trade tensions, policies should stay focused on peso assets and put pressure on the currency and the deleveraging and rebalancing the economy away from capital account. Against this backdrop, continued a growth model based on credit-fueled investment aplementation of the stabilization plan under the toward one that is more sustainable and led by private IMF-supported economic reform program is crucial onsumption. Reducing leverage in the economy will to shore up investor confidence and restore sustainable require continued scaling back of widespread implicit growth that lifts living standards for all segments of guarantees on debt, early recognition and disposal society. To this end, meeting the primary fiscal balance of distressed assets, and fostering more market-based target of zero in 2019 and I percent of GDP in 2020 credit allocation that better aligns risk-adjusted returns is essential to bring down financing needs and avoid with borrowing costs. Building on the recent increases reigniting liquidity pressures Continued achievement in the private consumption share of GDP(up close of monetary targets will be crucial to re-anchoring to 40 percent in 2017 from 35 percent in 2012), nflation expectations and rebuilding central bank continued rebalancing will require a more progressive credibility. Complementing these efforts to stabilize tax code; higher spending on health, education, and the economy in the near term, a resumption of the social transfers; and reduced barriers to labor mobility. structural reform agenda will help lift the economys Enhancing productivity growth will require reducing nedium-term growth prospects the footprint of state-owned enterprises and further In Brazil the main priority is to contain rising reducing barriers to entry in certain sectors, such as public debt while ensuring that needed social spending telecommunications and banking. To avoid a sharp remains intact. The spending cap introduced in 2016, Intemational Monetary Fund April 2019
24 WORLD ECONOMIC OUTLOOK: Growth Slowdown, Precarious Recovery International Monetary Fund | April 2019 Tighter external financial conditions can expose vulnerabilities related to high public debt as well as balance sheet maturity and currency mismatches accumulated during years of ultralow interest rates (see Box 1.1 of the April 2019 Fiscal Monitor for an analysis of the fiscal implications of potentially tighter financial conditions in emerging market economies). Fiscal policy should ensure that debt ratios remain sustainable, which would also contain borrowing costs and create space to combat downturns. Improving the targeting of subsidies, rationalizing recurrent expenditures, and mobilizing revenue can help preserve capital outlays needed to boost potential growth and the social spending that improves inclusion. In some cases, macroprudential regulatory and supervisory frameworks will have to be strengthened to deal with high private debt burdens, rein in excess credit growth, and contain balance sheet currency and maturity mismatches. Exchange rate flexibility can complement these policies by helping to buffer shocks. It can also help prevent persistent misalignments of relative prices that lead to resource misallocation and the buildup of financial imbalances. Across all economies, reforms to ensure sustainable, inclusive growth remain essential, particularly given that the medium-term prospects for per capita growth are relatively subdued for many economies in this group. In China, the economy’s reliance on credit has declined somewhat following regulatory efforts to rein in shadow banking and control the buildup of debt. Despite recent weaker momentum stemming from trade tensions, policies should stay focused on deleveraging and rebalancing the economy away from a growth model based on credit-fueled investment toward one that is more sustainable and led by private consumption. Reducing leverage in the economy will require continued scaling back of widespread implicit guarantees on debt, early recognition and disposal of distressed assets, and fostering more market-based credit allocation that better aligns risk-adjusted returns with borrowing costs. Building on the recent increases in the private consumption share of GDP (up close to 40 percent in 2017 from 35 percent in 2012), continued rebalancing will require a more progressive tax code; higher spending on health, education, and social transfers; and reduced barriers to labor mobility. Enhancing productivity growth will require reducing the footprint of state-owned enterprises and further reducing barriers to entry in certain sectors, such as telecommunications and banking. To avoid a sharp near-term growth slowdown that could derail the overarching reform agenda, some centrally financed on-budget fiscal expansion in 2019 may be appropriate. It should avoid large-scale infrastructure stimulus and instead emphasize targeted transfers to low-income households so as to lower poverty and inequality (Box 1.2 of the April 2019 Fiscal Monitor). In India, continued implementation of structural and financial sector reforms with efforts to reduce public debt remain essential to secure the economy’s growth prospects. In the near term, continued fiscal consolidation is needed to bring down India’s elevated public debt. This should be supported by strengthening goods and services tax compliance and further reducing subsidies. Important steps have been taken to strengthen financial sector balance sheets, including through accelerated resolution of nonperforming assets under a simplified bankruptcy framework. These efforts should be reinforced by enhancing governance of public sector banks. Reforms to hiring and dismissal regulations would help incentivize job creation and absorb the country’s large demographic dividend; efforts should also be enhanced on land reform to facilitate and expedite infrastructure development. In Argentina, projections for growth have been revised upward, and higher nominal wages and rising inflation expectations are expected to generate more persistent inflationary pressures in 2019 than projected in the October 2018 WEO. Downside risks to the economy remain sizable, the materialization of which could lead to a shift in investor preferences away from peso assets and put pressure on the currency and the capital account. Against this backdrop, continued implementation of the stabilization plan under the IMF-supported economic reform program is crucial to shore up investor confidence and restore sustainable growth that lifts living standards for all segments of society. To this end, meeting the primary fiscal balance target of zero in 2019 and 1 percent of GDP in 2020 is essential to bring down financing needs and avoid reigniting liquidity pressures. Continued achievement of monetary targets will be crucial to re-anchoring inflation expectations and rebuilding central bank credibility. Complementing these efforts to stabilize the economy in the near term, a resumption of the structural reform agenda will help lift the economy’s medium-term growth prospects. In Brazil, the main priority is to contain rising public debt while ensuring that needed social spending remains intact. The spending cap introduced in 2016