An Assessment of the State of the World

Oliver Blanchard is the chief economist for the IMF.  He wrote a nice piece about the big forces affecting world growth over the next year (see here for link).

In the medium term he mentions:

• 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.

 Note that the class so far has concerned his first bullet.  Then he adds two more issues:
 

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

The change in the price of oil is a macroeconomic shock (think of shifting curves in aggregate demand and IS-LM models)

•  Exchange rate movements have been unusually large.

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.

He takes all these things and says that he expects world growth to be about the same as last year.