World Economic Outlook – Slowing Growth, Rising Risks

International Monetary Fund

Executive Summary

The economic recovery has become much more uncertain. The World Economic Outlook projects global growth to be 4% in 2012, assuming policymakers in Europe and the U.S. are able to address the issues facing their economies, as well as the market volatility will decrease.

There are two main forces driving this uncertainty: a slow recovery in advanced economies, and a large increase in fiscal and financial uncertainty. Both developments call for strong policies to improve the outlook and reduce risks. Such policies should focus on fiscal consolidation, strengthening the financial system, and pushing for an external rebalancing where advanced economies must increase net exports, while emerging economies with large account surpluses should move from foreign to domestic demand.

Private demand is still stagnant in many advanced economies in part due to tight bank lending, the legacy of the housing boom, and high leverage in households. At the same time, world imbalances seem to be increasing as domestic demand in the U.S. remains low, while foreign demand in emerging economies with current account surpluses remains high. With respecto to fiscal and financial uncertainty, markets have become more skeptical about the ability of countries to stabilize their public debt. Markets have also started worrying about the banks holding sovereign debt, causing tighter lending and high levels of liquidity mainly in Europe.

Emerging economies have been largely inmune to these adverse developments. While managing volatile capital flows, they have continued to sustain high growth. However, these countries may have to deal with adverse export conditions, more volatile capital flows and lower commodity prices.