The International Monetary Fund has just published its six-monthly World Economic Outlook (WEO). The publication assesses the state of the global economy and forecasts economic growth and other indicators over the next few years. So what is this latest edition predicting?
Well, once again the IMF had to adjust its global economic growth forecasts down from those made six months ago, which in turn were lower than those made a year ago. As Larry Elliott comments in the Guardian article linked below:
Every year, economists at the fund predict that recovery is about to move up a gear, and every year they are disappointed. The IMF has over-estimated global growth by one percentage point a year on average for the past four years.
In this latest edition, the IMF is predicting that growth in 2015 will be slightly higher in developed countries than in 2014 (2.0% compared with 1.8%), but will continue to slow for the fifth year in emerging market and developing countries (4.0% in 2015 compared with 4.6% in 2014 and 7.5% in 2010).
In an environment of declining commodity prices, reduced capital flows to emerging markets and pressure on their currencies, and increasing financial market volatility, downside risks to the outlook have risen, particularly for emerging market and developing economies.
So what is the cause of this sluggish growth in developed countries and lower growth in developing countries? Is lower long-term growth the new norm? Or is this a cyclical effect – albeit protracted – with the world economy set to resume its pre-financial-crisis growth rates eventually?
To achieve faster economic growth in the longer term, potential national output must grow more rapidly. This can be achieved by a combination of more rapid technological progress and higher investment in both physical and human capital. But in the short term, aggregate demand must expand sufficiently rapidly. Higher short-term growth will encourage higher investment, which in turn will encourage faster growth in potential national output.
But aggregate demand remains subdued. Many countries are battling to cut budget deficits, and lending to the private sector is being constrained by banks still seeking to repair their balance sheets. Slowing growth in China and other emerging economies is dampening demand for raw materials and this is impacting on primary exporting countries, which are faced with lower exports and lower commodity prices.
Quantitative easing and rock bottom interest rates have helped somewhat to offset these adverse effects on aggregate demand, but as the USA and UK come closer to raising interest rates, so this could dampen global demand further and cause capital to flow from developing countries to the USA in search of higher interest rates. This will put downward pressure on developing countries’ exchange rates, which, while making their exports more competitive, will make it harder for them to finance dollar-denominated debt.
As we have seen, long-term growth depends on growth in potential output, but productivity growth has been slower since the financial crisis. As the Foreword to the report states:
The ongoing experience of slow productivity growth suggests that long-run potential output growth may have fallen broadly across economies. 
Persistently low investment helps explain limited labour productivity and wage gains, although the joint productivity of all factors of production, not just labour, has also been slow. Low aggregate demand is one factor that discourages investment, as the last World Economic Outlook report showed. Slow expected potential growth itself dampens aggregate demand, further limiting investment, in a vicious circle.
But is this lower growth in potential output entirely the result of lower demand? And will the effect be permanent? Is it a form of hysteresis, with the effect persisting even when the initial causes have disappeared? Or will advances in technology, especially in the fields of robotics, nanotechnology and bioengineering, allow potential growth to resume once confidence returns?
Which brings us back to the short and medium terms. What can be done by governments to stimulate sustained recovery? The IMF proposes a focus on productive infrastructure investment, which will increase both aggregate demand and aggregate supply, and also structural reforms. At the same time, loose monetary policy should continue for some time – certainly as long as the current era of falling commodity prices, low inflation and sluggish growth in demand persists.
Articles
Uncertainty, Complex Forces Weigh on Global Growth IMF Survey Magazine (6/10/15)
A worried IMF is starting to scratch its head The Guardian, Larry Elliott (6/10/15)
Storm clouds gather over global economy as world struggles to shake off crisis The Telegraph, Szu Ping Chan (6/10/15)
Five charts that explain what’s going on in a miserable global economy right now The Telegraph, Mehreen Khan (6/10/15)
IMF warns on worst global growth since financial crisis Financial Times, Chris Giles (6/10/15)
Global economic slowdown in six steps Financial Times, Chris Giles (6/10/15)
IMF Downgrades Global Economic Outlook Again Wall Street Journal, Ian Talley (6/10/15)
WEO publications
World Economic Outlook, October 2015: Adjusting to Lower Commodity Prices IMF (6/10/15)
Global Growth Slows Further, IMF’s latest World Economic Outlook IMF Podcast, Maurice Obstfeld (6/10/15)
Transcript of the World Economic Outlook Press Conference IMF (6/10/15)
World Economic Outlook Database IMF (October 2015 edition)
Questions
- Look at the forecasts made in the WEO October editions of 2007, 2010 and 2012 for economic growth two years ahead and compare them with the actual growth experienced. How do you explain the differences?
- Why is forecasting even two years ahead fraught with difficulties?
- What factors would cause a rise in (a) potential output; (b) potential growth?
- What is the relationship between actual and potential economic growth?
- Explain what is meant by hysteresis. Why may recessions have a permanent negative effect, not only on trend productivity levels, but on trend productivity growth?
- What are the current downside risks to the global economy?
- Why have commodity prices fallen? Who gains and who loses from lower commodity prices? Does it matter if falling commodity prices in commodity importing countries result in negative inflation?
- To what extent can exchange rate depreciation help commodity exporting countries?
- What is meant by the output gap? How have IMF estimates of the size of the output gap changed and what is the implication of this for actual and potential economic growth?
It was argued in an earlier blog on the Greek debt crisis that a deus ex machina was needed to find a resolution to the impasse between Greece and its creditors. The most likely candidate for such as role was the IMF.
Three days before the Greek referendum on whether or not to accept the Troika’s proposals, the IMF has stepped onto the stage. To the undoubted surprise of the other two partners in the Troika (the European Commission and the ECB), the IMF argues that Greece’s debts are unsustainable and that much more is needed than a mere bailout (which simply rolls over the debt).
According to the IMF, Greece needs €52bn of extra funds between October 2015 and December 2018, large-scale debt relief, a 20-year grace period before making any debt repayments and then 
debt repayments spread over the following 20 years. In return, Greece should commit to supply-side reforms to cut out waste, reduce bureaucracy, improve tax collection methods and generally improve the efficiency of the economic system.
It would also have to agree to the previously proposed primary budget surplus (i.e. the budget surplus excluding debt repayments) of 1 per cent of GDP this year, rising to 3.5 per cent in 2018.
So it this what commentators have been waiting for? What will be the reaction of the Greeks and the other two partners in the Troika? We shall see.
Articles
IMF says Greece needs extra €50bn in funds and debt relief The Guardian. Phillip Inman, Larry Elliott and Alberto Nardelli (2/7/15)
IMF: 3rd Greek bailout would cost €52bn. Or more? Financial Times, Peter Spiegel (2/7/15)
IMF: Greece needs to reform for sustainable debt, financing needs rising CNBC, Everett Rosenfeld (2/7/15)
The IMF has made an obvious point about Greece’s huge debt. Here’s why it still matters Quartz, Jason Karaian (3/7/15)
Greece: when is it time to forgive debt? The Conversation, Jagjit Chadha (2/7/15)
IMF Analysis
Greece: Preliminary Draft Debt Sustainability Analysis IMF (2/7/15)
Preliminary Debt Sustainability Analysis for Greece IMF (25/6/15)
Questions
- To which organisations is Greece indebted? What form to the debts take?
- To what extent is Greece’s current debt burden the result of design faults of the euro?
- What are the proposals of the IMF? What effect will they have on the Greek economy if accepted?
- How would the IMF proposals affect aggregate demand (a) directly; (b) compared with the proposals previously on the table that Greece rejected on 26 June?
- What would be the effects of Greek exit from the euro (a) for Greece; (b) for other eurozone countries?
- What bargaining chips can Greece deploy in the negotiations?
- Explain what is meant by ‘moral hazard’. Where in possible outcomes to the negotiations may there be moral hazard?
- What has been the impact of Greek austerity measures on the distribution of income and wealth in Greece?
- What are the practicalities of pursuing supply-side policies in Greece without further dampening aggregate demand?
With talks ongoing about resolving the Greek debt crisis, it is clear that there is no agreement that will satisfy both sides – the Greek government and the troika of lenders (the IMF, the ECB and the European Commission). Their current negotiating positions are irreconcilable. What is needed is something more fundamental to provide a long-term solution. What is needed is a ‘deus ex machina‘.
A deus ex machina, which is Latin for ‘god from a machine’, was a device used in Greek tragedy to solve an impossible situation. A god would appear from above, lowered by a crane, or from below through a trap door, and would put everything right. The tragedy would then be given a happy ending.
So what possible happy ending could be brought to the current Greek tragedy and who could be the deus ex machina?
The negotiations between Greece and the troika currently centre on extending credit by €7.2bn when existing debts come up for repayment. There are repayments currently due to the IMF, or by the end of June, of €1.5bn and more in July, September and December (another €3.2bn). There are also €6.7bn of Greek bonds held by the ECB, as part of the 2010 bailout programme, that are due for repayment in July and August. Without the €7.2 billion bailout, Greece will be unable to meet these debt repayments, which also include Treasury bills.
But the troika will only release the funds in return for harsh austerity measures, which involve further cuts to pensions and public expenditure. Greece would be required to run a substantial budget surplus for many years.
Greece could refuse, but then it would end up defaulting on debt and be forced out of the euro. The result would probably be a substantial depreciation of a newly restored drachma, rising inflation and many Greeks suffering even greater hardship – at least for a period of time.
So what is the possible deus ex machina? If you’re looking for a ‘god’ then it is best, perhaps, to look beyond the current actors. Perhaps the Americans could play the role in finding a solution to the impasse. Perhaps a small group of independent experts or politicians, or both, could find one. In either case, the politics of the situation would have to be addressed as well as the economics and finance.
And what would be the ‘fix’ to satisfy both sides? Ultimately, this has to allow Greek debt to be sustainable without further depressing demand and undermining the fabric of Greek society. This would almost certainly have to involve a large measure of debt forgiveness (i.e. debts being written off). It also has to avoid creating a moral hazard, whereby if the Greeks are seen as being ‘let off lightly’, this might encourage other indebted eurozone countries to be less willing to reduce their debts and make demands for forgiveness too.
Ultimately, the issue is a political one, not an economic one. This will require clever negotiation and, if there is a deus ex machina, clever mediation too.
Videos
Greek PM Tsipras warns lenders bailout plans ‘not realistic’ BBC News, Jim Reynolds (5/6/25)
Greece defers IMF payment until end of June BBC News, Chris Morris (5/6/15)
Greek debt talks: Empty shops and divided societies BBC News, Chris Morris (10/6/15)
Potential Grexit effects Deutsche Welle (13/6/15)
Articles
It’s time to end the pretence: Greece will never fully repay its bailout loan The Guardian, Andrew Farlow (9/6/15)
Greek exit would trigger eurozone collapse, says Alexis Tsipras The Guardian, Phillip Inman, Helena Smith and Graeme Wearden (9/6/15)
The eurozone was a dream of unity. Now Europe has turned upon itself The Guardian, Business leader (14/6/15)
Greece bailout talks: an intractable crisis with three possible outcomes The Guardian, Larry Elliott (2/6/15)
Greece needs an economic defibrillator and a debt write-off Financial Times letters, Ray Kinsella (25/3/15)
Greece’s new debt restructuring plan Times of Change, Peter Spiegel (5/6/15)
Eurozone still in denial about Greece BBC News, Robert Peston (3/6/15)
Greece bailout talks – the main actors in a modern-day epic The Guardian, Phillip Inman, Ian Traynor and Helena Smith (9/6/15)
Greece isn’t any old troubled debtor BBC News, Robert Peston (15/6/15)
Greece in default if debt deadline missed, says Lagarde BBC News (18/6/15)
Burden of debt to IMF and European neighbours proves too much for Greece The Guardian, Heather Stewart (17/6/15)
Paper
Ending the Greek Crisis: Debt Management and Investment led Growth Greek government
Questions
- To which organisations is Greece indebted? What form to the debts take?
- To what extent is Greece’s current debt burden the result of design faults of the euro?
- Would it be possible to restructure debts in ways that make it easier for Greece to service them?
- Should Greece be treated by the IMF the same way it treated the highly indebted poor countries (HIPCs) and granted substantial debt relief?
- What would be the effects of Greek exit from the euro (a) for Greece; (b) for other eurozone countries?
- What bargaining chips can Greece deploy in the negotiations?
- Explain what is meant by ‘moral hazard’. Where in possible outcomes to the negotiations may there be moral hazard?
- What has been the impact of Greek austerity measures on the distribution of income and wealth in Greece?
- What are the practicalities of pursuing supply-side policies in Greece without further dampening aggregate demand?
In two posts recently, we considered the pessimistic views of Robert Peston about the prospects for the global economy (see Cloudy skies ahead? and The end of growth in the West?). In this post we consider the views of Christine Lagarde, Managing Director of the International Monetary Fund, and Lord Adair Turner, the former head of the Financial Services Authority (FSA) (which was replaced in 2013 by the Financial Conduct Authority and the Prudential Regulation Authority).
Christine Lagarde was addressing an audience at Georgetown University in Washington DC. The first four links below are to webcasts of the full speech and subsequent interviews about the speech. 
She gives a more gloomy assessment of the global economy than six months ago, especially the eurozone economy and several emerging economies, such as China. There are short- to medium-term dangers for the world economy from political conflicts, such as that between Russia and the West over Ukraine. But there are long-term dangers too. These come from the effects of subdued private investment and low infrastructure spending by governments.
Her views are backed up by the six-monthly World Economic Outlook, published by the IMF on 7 October. There are links below to two webcasts from the IMF discussing the report and the accompanying datasets.
In the final webcast link below, Lord Turner argues that there is a “real danger of a simultaneous slowdown producing a big setback to growth expectations.” He is particularly worried about China, which is experiencing an asset price bubble and slowing economic growth. Other emerging economies too are suffering from slowing growth. This poses real problems for developed countries, such as Germany, which are heavily reliant on their export sector.
Webcasts
The Challenges Facing the Global Economy: New Momentum to Overcome a New Mediocre IMF Videos, Christine Lagarde (full speech) (2/10/14)
Christine Lagarde downbeat on global economy BBC News Canada, Christine Lagarde interviewed by Katy Kay (2/10/14)
IMF’s Lagarde on Global Economy, Central Banks Bloomberg TV, Christine Lagarde interviewed by Tom Keene (2/10/14)
Lagarde: Global economy weaker than envisioned 6 months ago, IMF to cut growth outlook CNBC (2/10/14)
IMF Says Uneven Global Growth Disappoints IMF Videos, Olivier Blanchard (7/10/14)
Time Is Right for an Infrastructure Push IMF Videos, Abdul Ablad (30/9/14)
China slowdown poses ‘biggest risk to global economy’ The Telegraph, Adair Turner (4/10/14)
Articles
Global Growth Disappoints, Pace of Recovery Uneven and Country-Specific IMF Survey Magazine (7/10/14)
Global economy risks becoming stuck in low growth trap The Telegraph, Szu Ping Chan (2/10/14)
American Exceptionalism Thrives Amid Struggling Global Economy Bloomberg, Rich Miller and Simon Kennedy (4/10/14)
World Bank cuts China growth forecast for next three years BBC News (6/10/14)
Beware a Chinese slowdown The Guardian, Kenneth Rogoff (6/10/14)
IMF says economic growth may never return to pre-crisis levels The Guardian, Larry Elliott (7/10/14)
IMF goes back to the future with gloomy talk of secular stagnation The Guardian, Larry Elliott (7/10/14)
Data
World Economic Outlook Database IMF (7/10/14)
World Economic Outlook IMF (October 2014)
Questions
- What are the particular ‘headwinds’ facing the global economy?
- Why is the outlook for the global economy more pessimistic now than six months ago?
- Why are increasing levels of debt and asset price rises a threat to Chinese economic growth?
- Why may China be more able to deal with high levels of debt than many other countries?
- In what ways are commodity prices an indicator of the confidence of investors about future economic growth?
- What are the determinants of long-term economic growth? Why are potential economic growth rates lower today than in the 2000s?
- How might governments today boost long-term economic growth?
- What are the arguments for and against governments engaging in large-scale public investment in infrastructure projects? What would be the supply-side and demand-side effects of such policies?
- If confidence is a major determinant of investment, how might bodies such as the IMF boost confidence?
- Why does the IMF caution against over-aggressive attempts to reduce budget deficits?
An historic agreement has been reached between Argentina over outstanding debt owed to creditor nations. Creditor nations come together as the ‘Paris Club’ and at a Paris Club meeting on May 28, details of a repayment plan were agreed. Argentina hopes that the agreement will enable it to start borrowing again on international markets: something that had been largely blocked by outstanding debt, which, up to now, Argentina had been unwilling to repay.
The problem goes back to 2001. Argentina was faced with international debt payments of $132bn, equalling some 27% of GDP and over 300% of export earnings. But at the time the country was in recession and debts were virtually impossible to service. It had received some help from the International Monetary Fund, but in December 2001, the IMF refused a request for a fresh loan of $1.3 billion
As Case Study 27.5 in MyEconLab for Economics, 8th edition explains:
This triggered a crisis in the country with mass rioting and looting. As the crisis deepened, Argentina announced that it was defaulting on its $166 billion of foreign debt.
This hardly came as a surprise, however. For many commentators, it was simply a question of when.
Argentina’s default on its debts was the biggest of its kind in history. In a series of dramatic measures, the Argentine peso was initially devalued by 29%. Over the next three months, the peso depreciated a further 40%.
The economy seemed in free-fall. GDP fell by 11% in 2002 and, by the end of the year, income per head was 22% below that of 1998. Unemployment was 21%.
Then, however, the economy began to recover, helped by higher (peso) prices for exports resulting from the currency depreciation. In 2003 economic growth was 9.0% and averaged 8.4% per annum from 2004 to 2008.
But what of the debt? In 2005, Argentina successfully made a huge debt swap with banks and other private creditors (see Box 27.1 in Economics, 8th edition). A large proportion of its defaulted debt was in the form of bonds. It offered to swap the old bonds for new peso bonds, but worth only 35% as much (known as a ‘haircut’). By the deadline of 25 February, there was a 76% take-up of the offer: clearly people thought that 35% was better than nothing! At a stroke, bonds originally worth $104 billion now became worth just $36.2 billion. Later the take-up of the offer increased to 93%. But still 7% held out.
Then in 2006 its debt of nearly $10 billion was repaid to the IMF. General government debt stock as a percentage of GDP fell from 172% in 2002 to 106% in 2006 and to 48% in 2010.
In September 2008, the government of President Cristina Kirchner pledged to use some of its foreign currency reserves of $47 billion to pay back the remainder of the defaulted debt still owed to Paris Club creditors. But negotiations stalled.
However, at the Paris Club meeting of 28 May this year, agreement was finally reached. Argentina will repay the outstanding $9.7bn owed to individual creditor countries. This will take place over 5 years, with a first instalment of $1.15bn being paid before May 2015.
Argentina hopes that the agreement will open up access to overseas credit, which, up to now, has been limited because of this unresolved debt. However, Argentina still owes money to the holders of the 7% of bonds who did not accept the haircut offered in 2005. Their claims are being heard in the US Supreme Court on 12 June this year. The outcome will be critical in determining whether Argentina will be able to raise new funds on the bond market.
Argentina clinches landmark debt repayment deal with Paris Club Reuters, Leigh Thomas and Sarah Marsh (29/5/14)
Argentina Will Repay Paris Club Debt 13 Years After Default Bloomberg, Charlie Devereux and Pablo Gonzalez (29/5/14)
Argentina and the capital markets: At least they have Paris The Economist (30/5/14)
Argentina’s Paris Club Deal to Bring Investment, Kicillof Says Bloomberg, Charlie Devereux (30/5/14)
Argentina Leaves Singer for Last in Preparing Bond Market Return Bloomberg BusinessWeek, Camila Russo and Katia Porzecanski (30/5/14)
Argentina in deal with Paris Club to pay $10bn debts BBC News (29/5/14)
Argentina debt deal could help ease re-entry to international markets The Guardian (29/5/14)
Argentina agrees deal to pay back $10bn debt The Telegraph (29/5/14)
Questions
- What is the Paris Club? Why did the recent meeting of the Paris Club concerning Argentina’s debt not include the IMF?
- What moral hazards are involved in (a) defaulting on debt; (b) offering debt relief to debtor countries; (c) agreeing to pay bond holders who did not accept the haircut?
- In hindsight, was it in Argentina’s interests to default on its international debts in 2001?
- Assume a country has a severe debt problem. What are the benefits and costs of using devaluation (or depreciation) to tackle the problem?
The International Monetary Fund has just published its six-monthly World Economic Outlook (WEO). The publication assesses the state of the global economy and forecasts economic growth and other indicators over the next few years. So what is this latest edition predicting?
