Tuesday, April 16, 2013

Why is the Global Recovery So Weak?

The Great Recession has been followed by the Not-So-Great Recovery. The IMF’s World Economic Outlook (WEO) shows that average incomes in advanced economies are rising, and are projected to rise, at a much slower rate than in past global recoveries. In contrast, incomes in emerging markets are growing at a much faster pace than during past recoveries—see chart 1. The WEO discusses several reasons for this divergence in fortunes. 

Box 1.1 of the WEO notes the divergence in fiscal polices. Government expenditures in advanced economies provided a stimulus at the onset of the Great Recession but withdrew it shortly thereafter. This is in contrast to what happened during past recoveries where government expenditures continued to increase. Again, in contrast, government expenditures in emerging markets have increased during this global recovery as they did in the past—see Chart 2. 

Caution about fiscal stimulus in advanced countries likely reflects the fact that they entered the Great Recession with much higher levels of debt than in the past—see Chart 3.

Box 1.1 does not get into an “an assessment of whether the different policy mix in this recession and recovery was appropriate. The response of policies may have been reasonable given the respective room available for fiscal and monetary policies in advanced economies. But there are also concerns. Even though monetary policy has been effective, policymakers had to resort to unconventional measures. Even with these measures, the zero bound on interest rates and the extent of financial disruption during the crisis have lowered the traction of monetary policy. This, together with the extent of slack in these economies, may have amplified the impact of contractionary fiscal policies. Four years into a weak recovery, policymakers may therefore need to worry about the risk of overburdening monetary policy because it is being relied on to deliver more than it has traditionally.”

Read Box 1.1 from the WEO here for the full analysis.