Wednesday, July 10, 2013

World Economic Outlook Update (July)

The July WEO update doesn't really say much. Well, on second thought, it doesn't say much that wasn't already known. Perhaps a bit more could have been said on the recent rise in treasury yields and the resulting constraints being faced by EM economies but all in all, the outlook seems muted and there seem to be very few notes of optimism.

A few more points:

- Weakening commodity prices

- Tail-risk mitigation including no more US debt ceiling drama and euro-backstop action on the do-what-it-takes front.

- The forecasts assume that recent volatility and associated rises in yield reflect a sort of one-off repricing of risk due to a protracted EM growth outlook slowdown and taper-talk in the US. This also comes with the warning of additional portfolio shifts and further rises in yields (USTs) that exacerbate capital outflows from EMs and diminish the growth outlook even more.

- For advanced economies, the priority remains near-term growth accompanied by credible medium-term fiscal consolidation (yep!). It cites low inflation and sizeable slack while advocating for continued monetary stimulus and mix of regulatory and macroprudential policy. Of course, clear communication continues to be an integral factor in mitigating volatility.

- For the euro-area, another push towards a full(er) banking union and policies to reduce fragmentation, lift demand and reform product and labor markets.

- Lastly, it stresses cyclical vulnerability in EMs - that sudden capital flow reversals have amplified trade-off risks. Lower than expected potential output has lead to higher fiscal constraints and while monetary easing can still function as the first line of defense, real rates are already low enough and outflows putting depreciation pressure on exchange rates are likely to constrain further easing.

- And there's a footnote (almost like a post-script) on sustainable consumption rebalancing for China and investment for Germany.

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