WORLD ECONOMIC OUTLOOKOctober 2016

Global Prospects and Policies Research Department, International Monetary Fund

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Global activity remains sluggish, broad-based policy response needed

• Global growth: moderate and uneven

– Advanced Economies (AE): sluggish performance amid weak investment

– Emerging Market and Developing Economies (EMDE): activity in stressed economies bottoming out, heterogeneous performance among others

• Potential for setbacks is high

• Policy priorities: differ across individual economies, but action relying on all levers needed to head off further growth disappointments

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Complex forces, realignments shaping the outlook

Advanced economies

• Varying degrees of post-crisis repair• Subdued demand

overlaid on… • Demographic headwinds• Weak productivity growth

contributing to• Low interest rates• Low inflation, weak trade

Emerging market and developing economies

• Rebalancing in China• Adjustment to lower commodity prices

• Demographic trends

• Slowing convergence• Weak trade

2

WorldAdvanced

Economies U.S. U.K. Japan Euro Area Germany Canada

Other Advanced

Asia

2015 3.2 2.1 2.6 2.2 0.5 2.0 1.5 1.1 2.1

2016 3.1 1.6 1.6 1.8 0.5 1.7 1.7 1.2 2.2

Revision from Jul.

20160.0 -0.2 -0.6 0.1 0.2 0.1 0.1 -0.2 0.0

2017 3.4 1.8 2.2 1.1 0.6 1.5 1.4 1.9 2.5

Revision from Jul.

20160.0 0.0 -0.3 -0.2 0.5 0.1 0.2 -0.2 -0.1

Growth projections: Advanced economies(percent change from a year earlier)

Sources: IMF, World Economic Outlook July 2016 Update; and IMF, World Economic Outlook October 2016. 3

World

Emerging Market and Developing Economies China India Brazil Russia

Commodity Exporting

Economies

Low IncomeDeveloping Countries

2015 3.2 4.0 6.9 7.6 -3.8 -3.7 0.8 4.6

2016 3.1 4.2 6.6 7.6 -3.3 -0.8 0.9 3.7

Revision fromJul. 2016 0.0 0.1 0.0 0.2 0.0 0.4 -0.6 -0.1

2017 3.4 4.6 6.2 7.6 0.5 1.1 2.5 4.9

Revision fromJul. 2016 0.0 0.0 0.0 0.2 0.0 0.1 -0.3 -0.2

Growth projections: Emerging markets and LIDCs(percent change from a year earlier)

Sources: IMF, World Economic Outlook July 2016 Update; and IMF, World Economic Outlook October 2016. 4

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10

2000 04 08 12 16 21

October '08 October '11 October '16

-4

-3

-2

-1

0

1

2

3

4

5

2000 04 08 12 16 21

October '08 October '11 October '16

AEs: Real GDP Growth(percent; various WEO forecast vintages)

Sources: IMF Staff estimates.

Growth projections beyond 2017

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EMDEs: Real GDP Growth(percent; various WEO forecast vintages)

What explains the pick up in global growth between 2016 and 2021?

• Shifting weights contribute one-third of the 0.70 percentage point increase

• Projected growth recoveries in six stressed EMs contribute slightly more (0.36 percentage point)

• Small increases in growth for other EMDEs and AEs explain the rest

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Increase in World Growth(Percentage points)

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Other EMDEs

Selected EMDEs

AEs

Change in country weights

Source: IMF staff calculations.Note: Selected EMDEs: Argentina, Brazil, Nigeria, Russia, South Africa, Venezuela.

Baseline assumptions for the medium term

• A gradual return to growth in stressed economies, and in commodity exporters, albeit to modest rates

• A gradual slowdown and rebalancing of China’s economy, with medium-term growth rates that (at about 6 percent) remain well above the average for other EMDEs

• Resilient growth in other EMDEs (e.g. India)

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Downside risks continue to dominate the outlook

• Protectionism. Inward-looking policy approaches could harm trade and integration, leading firms to defer investment and hiring decisions.

• Stagnation in AEs. An extended period of weak demand could lead to persistently lower output and inflation in advanced economies. An unmooring of inflation expectations could raise real interest rates and weaken demand further.

• China’s transition. China’s rebalancing path could prove bumpier than expected. With continued reliance on credit and slow restructuring, the risk of an eventual disruptive adjustment is growing.

• Financial threats to EMs. Underlying vulnerabilities in some large EMs (high corporate debt, declining profitability, and weak balance sheets) together with the need to build policy buffers still leave EMDEs exposed to sudden shifts in investor confidence.

• Non-economic shocks. A range of factors could hurt sentiment, from the drought in East and Southern Africa; civil wars and domestic strife in the Middle East and Africa; the refugee situation in neighboring countries and in Europe; terrorism; and the spread of the Zika virus.

• Upside potential. Comprehensive policy action to repair balance sheets, enact structural reforms, and support near-term demand would foster a stronger path for global growth. 8

ADVANCED ECONOMY TRENDSUNEVEN PROGRESS WITH RECOVERY

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Output still below potential

10

Output Gap(Percent of Potential Output)

Source: IMF staff estimates.

-12

-10

-8

-6

-4

-2

0

2

Maximum output gap (2008-16) 2016

Labor market scars still visible

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Unemployment Rate(Percent of the Labor Force)

Sources: Organisation for Economic Co-operation and Development labor statistics; and IMF staff estimates.

0

5

10

15

20

25

30

Peak unemployment rate (2008-16)20072016

AE workforce to shrink over the next 5 years

12

Population Growth(Percent)

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

"Old" AEs "New" AEs EMsexcluding

China

China LIDCs

1995-2004 2005-2015 2016-2021

Sources: United Nations Population and Development database; and IMF staff estimates.Working-age population defined as the population with age between 15 and 64.

Working Age Population Growth(Percent)

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

"Old" AEs "New" AEs EMsexcluding

China

China LIDCs

1995–2004 2005–15 2016–21

Weaker growth, stronger employment:downgraded forecasts of labor productivity…

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Employment, Fixed Investment, GDP(Percent; average growth rate for 2014-16)

Potential Growth(Percent; average growth rates)

0

1

2

3

4

5

Oct. 2014 Oct. 2015 Oct. 2016

GDPInvestmentEmployment

Source: IMF staff calculations.

0.0

0.5

1.0

1.5

2.0

2.5

Oct. 2014 Oct. 2015 Oct. 2016

2010-15 2016-21

… and expected interest rates

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WEO Long-Term Nominal Interest Forecasts(Percent)

Source: IMF staff calculations.

0

1

2

3

4

5

2005 2007 2009 2011 2013 2015 2017 2019 2021

Oct-16 Apr-16 Oct-15 Apr-15 Oct-14

EMERGING MARKET AND DEVELOPING ECONOMY TRENDS

15

20

40

60

80

100

120

140

160

11 12 13 14 15 16

S&P 500Euro Stoxx 50Nikkei 225MSCI emerging market

Financial market volatility1

(index; Jan. 1, 2007=100)Equity prices1

(index; Jan. 1, 2007=100)

0

50

100

150

200

250

300

350

400

11 12 13 14 15 16

VIX

G7 FX volatility

Emerging market FXvolatility

Sources: Bloomberg, L.P.; Haver Analytics; and IMF staff calculations. 1Latest available data are for September 21, 2016.

Recent months: calmer financial markets, improved sentiment toward EMs

-2

0

2

4

6

8

10

11 12 13 14 15 16

U.S.

Euro area

Japan

EMBIG sovereign

Government bond yields1

(percent)

16

Some recovery in commodity prices, especially for oil

Sources: IMF, World Economic Outlook; IMF, Primary Commodity Price System; and International Energy Agency (IEA).1 Latest available data are for September 15, 2016.2 APSP (Average Petroleum Spot Price): average of U.K. Brent, Dubai, and West Texas Intermediate, equally weighted.

Commodity price indices1

(Jan. 1, 2014 = 100)

17

20

30

40

50

60

70

80

90

100

110

120

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

Metals Food Crude Oil (APSP)2

18

-250

-200

-150

-100

-50

0

50

100

150

Outflow pressures have abated(Net capital flows, billion USD)

China: acute anxiety earlier in the year has faded

-1,000

-500

0

500

1,000

1,500

2,000

5.9

6.0

6.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

Jan/

15

Mar

/15

May

/15

Jul/1

5

Sep

/15

Nov

/15

Jan/

16

Mar

/16

May

/16

Jul/1

6

Sep

/16

Onshore CNY spot (RMB/USD)Offshore CNH spot (RMB/USD)CNH-CNY basis (pips; rhs)

Spread between Onshore and Offshore exchange rates has narrowed

19

-200

-100

0

100

200

300

400

500

FDI Port eq. Port. Debt Oth. Inv. Deriv. Total inflows

Emerging Markets: Capital Inflows, 2013-16(2013Q1-2016:Q2, billions of U.S. dollars)

Capital inflows to EMDEs have picked up …

Despite the recent relative calm, the outlook for EMDEs remains generally weaker than in the past

• External financial conditions for EMDEs have eased recently, but other factors weigh on the outlook

– China’s rebalancing and slowdown: spillovers magnified by its lower reliance on import- and resource-intensive investment

– Spillovers from persistently weak AE demand

– Commodity exporters: continued adjustment to lower revenue

– Conflict: political discord, domestic strife, geopolitical tensions

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A slowdown and rebalancing in China

The share of industry in GDP is shrinking… …as is the share of investment

38

40

42

44

46

48

50

52

0

2

4

6

8

10

12

14

16

07 08 09 10 11 12 13 14 15

Share of Gross Value Added(percent of GDP)

Real GDP growth (percent; year-over-year)

Industry (including construction: RHS)

Services (RHS)

35

40

45

50

55

60

05 06 07 08 09 10 11 12 13 14 15 16 17

Consumption:Nominal Investment: Nominal

Consumption: Real Investment: Real

Share of Gross Value added by Expenditure(Percent of GDP)

21

22

0

20

40

60

80

100

120

140

160

180

0

5

10

15

20

25

30

35

2006 2008 2010 2012 2014 2016:Q2

Real Credit Growth

Credit to GDP Ratio(right axis)

China: Rising Dependence on Credit(Percent)

But vulnerabilities are rising with continued reliance on credit

Policies: reinvigorate growth, improve its distribution, and make it durable

Comprehensive and consistent three-pronged approach to growth

• Accommodative monetary policy alone is not enough• Fiscal support—calibrated based on available fiscal space—remains crucial for lifting economic activity • Structural reforms—prioritized to maximize impact and combined with macroeconomic policies—are essential

Also need to enhance financial stability• Complete and implement regulatory reform• Monitor macroprudential and systemic aspects of capital flows• Improved global financial safety net

Reinvigorate multilateral cooperative efforts• Sustainably higher and inclusive growth needs more forceful, comprehensive, and well-communicated policies• Refocus the trade discussion towards the benefit of integration• Recognize need to address cooperatively other public-good problems, including refugees, between-country

inequality, epidemics, and extreme weather

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Thank you

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