An Assessment of the State of the World Economy

Lambert here: The beatings will continue until morale improves, on a country-specific basis.

Olivier Blanchard, Chief Economist, IMF. Originally published at VoxEU.

What has struck me the most as I was writing the foreword to the April World Economic Outlook is the complexity of the forces shaping macroeconomic evolutions around the world and the resulting difficulty of distilling a simple bottom line. Let me develop and expand.

Two deep forces are shaping these evolutions over the medium term:

  • Legacies of both the Global and the Eurozone crises are still visible in many countries.

To varying degrees, high levels of debt—public, corporate, or household—still weigh on spending and growth. Nonperforming loans, in a number of European countries, are still weighing on banks, and limiting credit supply to new borrowers. Low growth, in turn, makes deleveraging a slow process.

  • Potential output growth has declined.

As shown in Chapter 3, potential growth in advanced economies was already declining before the Crisis. Ageing, together with a slowdown in total productivity, have been at work. The Crisis made it worse, with the large decrease in investment leading to an even lower capital growth. As we exit from the Crisis, and as suggested by Chapter 4, capital growth will recover, but ageing and weak productivity growth will continue to weigh on growth. The effects are even more pronounced in emerging markets, where ageing, lower capital accumulation, and lower productivity growth are combining to significantly lower potential growth in the future. This is not just a worry about the future: More subdued prospects lead, in turn, to lower spending and a lower growth today.

Oil Prices and Exchange Rate Movements

On top of these two underlying forces, the current scene is dominated by two factors that both have major distributional implications, namely, the decline in the price of oil and large exchange rate movements.

  • The sharp decline in the price of oil came as a surprise.

Many explanations have been offered after the fact, the most convincing of which focus on the steady increase in supply from nonconventional sources combined with a change in strategy by OPEC (the Organisation of the Oil Exporting Countries). Most of these explanations suggest that the decline will likely be long lasting.

The price declines have effected a large reallocation of real income from oil exporters to oil importers. The early evidence suggests that in oil importers from the US, to the Eurozone, to China, and to India, the increase in real income is increasing spending. Oil exporters have cut spending but to a smaller extent; many have substantial financial reserves and are in a position to reduce spending slowly.

  • Exchange rate movements have been unusually large.

Among major currencies, the dollar has seen a major appreciation, and the euro and the yen a major depreciation. These movements clearly reflect major differences in monetary policy, with the US expecting to exit the zero lower bound this year, but with no such prospects for the Eurozone or Japan. Given that these differences have been clear for some time, the surprise here may be how long it took for these exchange rate movements to occur. To the extent that both the Eurozone and Japan were at risk of another relapse, the euro and yen depreciations will help. To some extent, the US has the policy room to offset the adverse effects of the dollar appreciation. Thus, this adjustment of exchange rates must be seen, on net, as good news for the world economy.

The Four Forces Together Create a Patchwork of Growth Prospects

Now, put these four forces together. Some countries suffer from legacies, others do not. Some countries suffer from lower potential growth, others do not. Some countries gain from the decrease in the price of oil, others lose. Some countries’ currencies move with the dollar, others move with the euro and the yen. Add to this a couple of idiosyncratic developments, such as the economic troubles in Russia, or the weakness of Brazil. It is no surprise that the assessment must be granular. On net, our baseline forecasts are that advanced countries will do better this year than last year, that emerging markets and low-income countries will slow down relative to last year, and that, as a result, global growth will be roughly the same as last year. But these aggregate numbers do not do justice to the diversity of underlying evolutions.

Moving from the baseline to the risks, have they increased? I see macroeconomic risks as having slightly decreased. The major risk last year—namely, a recession in the Eurozone —has decreased, as has the risk of deflation. But financial and geopolitical risks have increased. Large movements in relative prices, whether exchange rates or the price of oil, create losers and winners. Energy companies and oil-producing countries face both tougher conditions and higher risks. So do non-US companies and governments that have borrowed in dollars. If large exchange rate movements were to continue, they could both create further financial risks and reignite talk of currency wars. A Greek crisis cannot be ruled out, an event that would surely unsettle financial markets. Turmoil continues in Ukraine and in the Middle East, although so far without systemic economic implications.

Finally, given the diversity of situations, it is obvious that policy advice must be country-specific. Even so, some general principles continue to hold. Measures to sustain growth both in the short and the longer term continue to be of the essence. With the introduction of quantitative easing in the Eurozone, monetary policy in advanced economies has largely accomplished what it can. Fiscal room exists in some countries but is limited; the decrease in the price of oil has created an opportunity to decrease energy subsidies and replace them with better-targeted programmes. The case for more infrastructure investment we made in the previous World Economic Outlook remains. And while structural reforms cannot do miracles, they can increase the level of output and increase growth for some time. The proper menu differs by country. Given the short-term political costs associated with many of these reforms, the challenge will be to choose carefully among them.


IMF (2015), World Economic Outlook: Uneven Growth – Short- and Long-Term Factors, Washington, DC, April.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Jesper

    No mention of economic inequality and unequal gains in the ‘recovery’?
    Inequality is, according to more than a few studies, bad for economic growth so unless those studies have been rubbished then inequality might be worth a mention.

    Wouldn’t be much political costs involved in doing some structural reforms that would lead to the gains spreading wider and included gains for the poor. Although such reforms might lead to economic costs for some politicians.

    1. bruno marr

      Yes. And from the description “economic troubles in Russia”, one would think the problems were internal and not the result of external sanctions by the US and its lackeys.

      Warren Buffet got it right: a company that employs an Economist has one too many employees. They just make sh*t up.

  2. Hugh

    I don’t get the obsession with growth. How can there be endless growth on a finite planet?

      1. optimader

        Equitable distribution
        generational pass along of huge passive investments w/ no threshold is unsustainable, stagnant and more often than not (IMO) make for toxic heirs.

      1. two beers

        You don’t meant to imply that the western banking system is a Ponzi scheme, do you?

      2. NoFreeWill

        Growth is intrinsic to capitalism, and especially to predatory finance capital. The fact that we are going to come to the end of growth (or human extinction) means we will come to the end of capitalism.

        1. Gaianne

          Excellent, No-free-will.

          And there you have the elephant in the room.

          Do try to avoid being trampled as you scramble for the exits.


          PS It is never too late to start growing your own food, and–as James Howard Kundstler says–making other arrangements.

      3. JTMcPhee

        Yah, and growth,especially the kind of consumptive, metastatic, wasting growth that is kleptocombustocombato capitalism, is characteristic of malignant cancer. Thevtumors do GREAT, until the sufferers drop dead…

    1. Jesper

      I think the reason why the idea of growth is constantly sold is that otherwise the ‘have-nots’ would have no hope of ever becoming part of the ‘haves’. If there is no hope then the have-nots might feel that it is time to take drastic action and forcibly share the finite resources.

      The rising tide lifts all boats analogy is often used. When the economy grows the ‘have-nots’ should in theory also get more so there is no need for the ‘haves’ to share. But as we’ve seen the past decades the growth of the economy has all gone to the ‘haves’…. Maybe there will be growth so the poor of today won’t stay poor, or maybe there will be growth and all the gains will go to the wealthy of today.

      Is there hope for improvement for the poor of today if there is no growth?
      Is there hope for improvement for the poor of today if there is growth but the growth continues to bypass them and goes to the wealthy of today?
      History might be a guide, time will tell.

    2. Llewelyn Moss

      Isn’t it all part of the Stawk Market Ponzi. You buy a stawk on the hope/prayer its revenue/profit will grow. Without the promise of growth, the house of cards collapses.

    3. Alejandro

      I have to admit that I feel an ever increasing repugnancy (almost visceral) for the word “growth” in most political-economic contexts, especially when regurgitated by the so-called corporate media. Maybe it’s the mindless repetition, without any attempt at refutation that makes it so difficult to listen to.

      NC, in recent times, adopted the term “groaf”, which imho is a more accurate description of the mindless barking sound made by these corporate media talking faces. Many here, have highlighted its context from an eco-economics POV, which imo is a more honest descriptor. Even in this context, “growth” would imply the caveats of “relative to what?” and “what’s un-growing?” On occasion, the word “activity” is used instead…and I have to admit that it brings a sense of sanity and makes the story-telling almost palatable…but then they toggle back to the barking sound of “groaf” and I come away feeling that I was steered into a cognitive dead-end.

      One can reasonably conclude that economic “growth” means that for any activity to be “legitimate”, it must be linked to some corporation’s “profit”, “yield” or “claim on surplus” but without the caveat of ‘justifying’ the proportionality or maybe more accurately the dis-proportionality, often referred to as “inequality”, not to mention the disguising of the externalities as always somebody else’s problem.

      1. JEHR

        Alejandro, I like your choice of “activity” rather than “growth.” At least with activity there is an inclusion of workers and people actually doing real work rather than just speculating with money in order to make more money or depleting resources without any attention to environmental degradation. If mining were seen as an activity then there could be restrictions on pollution that would be another “activity.” Love that word choice.

        1. JTMcPhee

          While we’re on the subject of semiotics and syntax, could I put in a plug to extirpate that odious phrase “make money”? There are so many things wrong with it… That entitlement notion, what central banks do, CEO ” compensation,” HFT quantum computers ” doing it,” all that crap and so much more…

    4. Dirk77

      +1 to all of the above. Further, the more physical growth, the more something else must shrink. Like open space, which is what other creatures use. So it’s worse than a ponzi scheme. If only the growth were intellectual.

        1. Hugh 2

          No, I’m a different Hugh.
          I was thinking, as long as GDP grows, debt can be sustained, since debt is measured as the ratio: debt/GDP.
          So, since debt is always growing, due to compounding interest, GDP ‘has’ to grow continuously.
          Kind of a ponzi, which tend to collapse eventually.

    5. Santi

      Re: growth in a finite environment.
      Numbers are cheap, so they can grow indefinitely even in a finite environment. But even when they talk about growth, this is not the real business. Capitalism needs scarcity for economic growth. Keeping the same example, look at how they have been creating scarcity, and economic growth, with the 32 bits IP addresses, and how IPv6 does not fly with its plentiful of 128 bits addresses, mostly because its growth without scarcity makes for less economic value than trading and tolling on the old addresses…

  3. abynormal

    can’t remember where i read this week that one of the fed govs suggested we/they slow down and be careful. yeah, good luck with that now that the bots are tripped at the least crinkle of rice paper.

    sideline… complied a short list of retail closings on the horizon…
    180 Abercrombie & Fitch (by 2015)
    175 Aeropostale (“over the next several years”)
    75 Aeropostale (through January 2015)
    150 American Eagle Outfitters (through 2017)
    223 Barnes & Noble (through 2023)
    2 Belk
    3 Bi-Lo Supermarkets
    2 Big Lots
    265 Body Central / Body Shop
    66 Bottom Dollar Food
    25 Build-A-Bear (through 2015)
    32 C. Wonder
    21 Cache
    120 Chico’s (through 2017)
    200 Children’s Place (through 2017)
    17 Christopher & Banks
    70 Coach (fiscal 2015)
    70 Coco’s /Carrows
    ​7 Dahl’s Foods
    300 Deb Shops
    92 Delia’s
    1 Disney Store
    340 Dollar Tree/ Family Dollar
    39 Einstein Bros. Bagels
    50 Express (through 2015)
    3 Food Lion
    ​31 Frederick’s of Hollywood
    50 Fresh & Easy Grocey Stores
    14 Friendly’s
    65 Future Shop (Best Buy Canada)
    54 Golf Galaxy (by 2016)
    8 Good Cents Grocery Stores
    1 Goodyear
    50 Guess (through 2015)
    26 Gymboree
    2 Hilo Hattie
    40 jcpenney
    170 Jones Group (by mid-2014 )
    127 Jones New York Outlet
    abercrombie & dollar tree? how are they on the same list? people living ‘out’ are already hurting to cover the miles to get to lower cost retail stores. i see large migration in the works…and what will happen as the cities fill with more unemployed?

    1. Llewelyn Moss

      >> What will happen as the cities fill with more unemployed?
      I think we got the answer in Baltimore.

      1. JTMcPhee

        Time for a new model– we can hope it won’t look like those scenes in “Solent Green,” with the sharp-toothed scoopsvon the garbage truck tossing the recyclye-ees into the compactors…

    2. MLS

      While I don’t argue that the global economy is “doing fine”, (in fact, I think it’s much weaker than more people let on), I don’t think this list of retail store closings is a good illustration of much. Most of these stores are of marginal quality (A&F and Aero are both poorly run companies in industries where tastes and preferences are very fickle), small-timers in highly competitive/consolidating industries (most of the grocery stores on here) and/or are legacy players in industries where the internet has taken share (Barnes & Noble, Future Shop).

      Dollar Store is only on this list because of the recent merger with Family Dollar; they are mostly just closing stores in overlapping geographies.

      That said, I will also add that the US overbuilt retail throughout much of the 90s and 2000s during the tech bubble recovery. So there is great overcapacity just as consumers have less to spend (notice any empty strip malls lately?), and weaker hands are now being shaken out. That so many are still around is likely due to ever lower interest rates and our role as consumers to borrow and spend (whether through necessity or just bad decisions).

  4. DanB

    The author, Blanchard, writes, “The sharp decline in the price of oil came as a surprise.
    Many explanations have been offered after the fact, the most convincing of which focus on the steady increase in supply from nonconventional sources combined with a change in strategy by OPEC…”
    The fall in oil prices has been expected by those who understand how peak oil affects the economy. Gail-the-Actuary and Steve Ludlum, at Economic Undertow, have been explaining why this drop in prices would occur -Ludlum called it, essentially- as more consumers go broke and, simultaneously, the cost of extracting “oil” -fracking and tar sands- inexorably rises. The public policy issues -as if governments really care about the public and policy- revolve around accepting that we are at the end of the physical limits to growth of the modern economy. This should lead us to ask -again, if there would be a concern about public policy- how to justly redistribute a shrinking economic pie and avoid ecological catastrophe.

  5. AWB

    IOW, the status quo is alive and well, reports to the contrary notwithstanding.

    Jesper, agreed. There appears to be no motivation to deal with the root cause, just the opposite, to sustain it as long as possible, at any and all cost. The list of reasons is short, not the least of which is 1 Corinthians 4:4.

  6. New Deal democrat

    The strong $US is killing exports and production. Since mid-February, steel production has been down on average about 10% YoY (it is rumored that China is dumping steel onto the global market). Coal transport by rail is also down almost 10% YoY (other producers like Brazil, Australia, and Russia are gaining market share). Industrial metals rail transport is down over 7% YoY.

    I have been unable to find any information as to whether, in the past, a strong dollar has been enough to tip the US into recession, or whether the dollar will weaken before that happens.

    1. different clue

      Free Trade has been what has been killing jobs here in this country, by deliberate design. The way to restore jobs here would be to abolish Free Trade and restore Forced Equity of Trade or more simple-mindedly restore Belligerent Protectionism if Forced Trade Equity is too hard to think about.

      If imports of forks , spoons and knives were banned and Americans were permitted to make the forks, spoons and knives which all the other Americans buy for example, then some dejobbed fork spoon and knife makers would get their jobs back. The less imports we accepted, the less exports we would have sell. We could have a more self-contained economy with most of us employing eachother, as we had after the New Deal and before Free Trade Agreements. Other countries could do the same.

      By the way, what is so great about selling coal? More coal sold means more coal burned and therefor more carbon skydumped. And also more mercury seadumped. Who exactly is this good for?

  7. susan the other

    That was brief but interesting. Deleveraging, low to no growth, cheap oil, currency manipulation. For many years to come. I believe this is right where the IMF wants it. They’ll be making lotsa loans and they want governments to be able to pay them back.

    1. ian

      Are you sure they want them paid back?
      Isn’t that what new loans are for? (to pay back the old ones).

  8. jgordon

    Right! We need economies to grow like we need cancer to grow. “Growth” is a euphemism for turning natural, irreplaceable resources shared by all people and animals into cheap plastic trash for the few that’ll end up in a landfill in a few months. These sociopaths have given us terminal cancer with their industrial growth and then sold us Carbon Trading amputation surgeries and Green Revolution chemotherapy to help us cope with all that necessary poisonous growth they’ve given us. Now that’s a self-licking ice cream cone!

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