FOR RELEASE: STRICTLY CONFIDENTIALIn Washington (EST): 10:00 a.m., January 24, 2012 UNTIL RELEASED

Global Recovery Stalls, Downside Risks Intensify

The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere.Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated.Global output is projected to expand by 3¼ percent in 2012 (Table 1 and Figure 1)

—

a downward revisionof about ¾ percentage point relative to the September 2011 World Economic Outlook (WEO). This islargely because the euro area economy is now expected to go into a mild recession in 2012 as a result of the rise in sovereign yields, the effects of bank deleveraging on the real economy, and the impact of additional fiscal consolidation. Growth in emerging and developing economies is also expected to slowbecause of the worsening external environment and a weakening of internal demand. The most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth,while sustaining adjustment, containing deleveraging, and providing more liquidity and monetaryaccommodation. In other major advanced economies, the key policy requirements are to address medium-term fiscal imbalances and to repair and reform financial systems, while sustaining the recovery. Inemerging and developing economies, near-term policy should focus on responding to moderating domesticgrowth and to slowing external demand from advanced economies.

Financial risks escalate, global growthdecelerates

Global growth prospects dimmed and risks sharplyescalated during the fourth quarter of 2011, as theeuro area crisis entered a perilous new phase.Activity remained relatively robust throughout thethird quarter, with global GDP expanding at anannualized rate of 3½ percent

—

only slightly worsethan forecast in the September 2011 WEO. Growthin the advanced economies surprised on the upside,as consumers in the United States unexpectedlylowered their saving rates and business fixedinvestment stayed strong. The bounce back fromthe supply-chain disruptions caused by the March2011 Japanese earthquake was also stronger thananticipated. Additionally, stabilizing oil priceshelped support consumption. These developments,however, are not expected to sustain significantmomentum going forward.By contrast, growth in emerging and developingeconomies slowed more than forecast, possibly dueto a greater-than-expected effect of macroeconomicpolicy tightening or weaker underlying growth.

-10-8-6-4-2024681012

Figure 1. Global GDP Growth

(Percent; quarter over quarter, annualized)

Source: IMFstaff estimates.Emerging anddeveloping economiesAdvancedeconomies

20071210110809

World

2 WEO Update, January 2012

Estimates201020112012201320122013201120122013

World Output

5.23.83.33.9

–

0.7

–

0.63.33.44.0Advanced Economies3.21.61.21.9

–

0.7

–

0.51.31.32.1

United States3.01.81.82.20.0

–

0.31.81.52.4Euro Area 1.91.6

–

0.50.8

–

1.6

–

0.70.8

–

0.21.2Germany3.63.00.31.5

–

1.00.01.80.71.6France1.41.60.21.0

–

1.2

–

0.90.90.51.3Italy1.50.4

–

2.2

–

0.6

–

2.5

–

1.1

–

0.1

–

2.70.9Spain

–

0.10.7

–

1.7

–

0.3

–

2.8

–

2.10.2

–

2.10.6Japan4.4

–

0.91.71.6

–

0.6

–

0.4

–

0.91.91.5United Kingdom2.10.90.62.0

–

1.0

–

0.40.81.02.4Canada3.22.31.72.0

–

0.2

–

0.52.11.72.0Other Advanced Economies

5.83.32.63.4

–

1.1

–

0.32.93.23.5Newly Industrialized Asian Economies8.44.23.34.1

–

1.2

–

0.33.84.33.8

Emerging and Developing Economies

7.36.25.45.9

–

0.7

–

0.65.96.06.3

Central and Eastern Europe4.55.11.12.4

–

1.6

–

1.13.41.43.0Commonwealth of Independent States4.64.53.73.8

–

0.7

–

0.63.23.53.7Russia4.04.13.33.5

–

0.8

–

0.53.52.84.0Excluding Russia6.05.54.44.7

–

0.7

–

0.4. . .. . .. . .Developing Asia9.57.97.37.8

–

0.7

–

0.67.47.97.6China10.49.28.28.8

–

0.8

–

0.78.78.58.4India9.97.47.07.3

–

0.5

–

0.86.76.97.2ASEAN-5

6.94.85.25.6

–

0.4

–

0.23.77.45.0Latin America and the Caribbean 6.14.63.63.9

–

0.4

–

0.23.93.35.0Brazil7.52.93.04.0

–

0.6

–

0.22.13.84.1Mexico5.44.13.53.5

–

0.1

–

0.24.13.13.6Middle East and North Africa (MENA)

4.33.13.23.6. . .. . .. . .. . .. . .Sub-Saharan Africa5.34.95.55.3

–

0.3

–

0.2. . .. . .. . .South Africa2.93.12.53.4

–

1.1

–

0.62.43.03.7

Memorandum

European Union2.01.6

–

0.11.2

–

1.5

–

0.70.80.31.7World Growth Based on Market Exchange Rates4.12.82.53.2

–

0.7

–

0.4. . .. . .. . .

World Trade Volume (goods and services)12.76.93.85.4

–

2.0

–

1.0. . .. . .. . .

ImportsAdvanced Economies11.54.82.03.9

–

2.0

–

0.8. . .. . .. . .Emerging and Developing Economies15.011.37.17.7

–

1.0

–

1.0. . .. . .. . .ExportsAdvanced Economies12.25.52.44.7

–

2.8

–

0.8. . .. . .. . .Emerging and Developing Economies13.89.06.17.0

–

1.7

–

1.6. . .. . .. . .

Commodity Prices (U.S. dollars)

Oil

27.931.9

–

4.9

–

3.6

–

1.8

–

3.1. . .. . .. . .Nonfuel (average based on world commodity export weights)26.317.7

–

14.0

–

1.7

–

9.32.2. . .. . .. . .

Consumer Prices

Advanced Economies1.62.71.61.30.2

–

0.12.91.21.3Emerging and Developing Economies

6.17.26.25.50.30.46.55.64.8

London Interbank Offered Rate (percent)

On U.S. Dollar Deposits0.50.50.90.90.40.3. . .. . .. . .On Euro Deposits0.81.41.11.2

–

0.1

–

0.4. . .. . .. . .On Japanese Yen Deposits0.40.40.50.20.20.0. . .. . .. . .

Table 1. Overview of the

World Economic Outlook

Projections

(Percent change unless noted otherwise)

Year over YearDifference from September2011 WEO ProjectionsQ4 over Q4ProjectionsProjections

Simple average of prices of U.K. Brent, Dubai, and West Texas Intermediate crude oil. The average price of oil in U.S. dollars a barrel was $104.23 in 2011; the assumed price based on futuresmarkets is $99.09 in 2012 and $95.55 in 2013.

Six-month rate for the United States and Japan. Three-month rate for the euro area.Note: Real effective exchange rates are assumed to remain constant at the levels prevailing during November 14

–December

12, 2011. When economies are not listed alphabetically, they are orderedon the basis of economic size. The aggregated quarterly data are seasonally adjusted.

The quarterly estimates and projections account for 90 percent of the world purchasing-power-parity weights.

Excludes the G7 and euro area countries.

The quarterly estimates and projections account for approximately 80 percent of the emerging and developing economies.

Indonesia, Malaysia, Philippines, Thailand, and Vietnam.

The September 2011 WEO projections did not include Libya due to the uncertain political situation,but Libya is included in these aggregate WEO calculations. Excluding Libya, MENA growthprojections for 2012 and 2013

are lower by –

1.6

and –

1.2 percentage points, respectively, than in the September 2011 WEO. Note that the World and Emerging and Developing Economies aggregatesare also not directly comparable with those in the September 2011

WEO because of Libya’s inclusion

but Libya’s weight in these aggregates is much lower

3 WEO Update, January 2012

Lately, the near-term outlook has noticeablydeteriorated, as evidenced by worsening high-frequency indicators in the last quarter of 2011(Figure 2). The main reason is the escalating euroarea crisis, which is interacting with financialfragilities elsewhere (Figure 3). Specifically,concerns about banking sector losses and fiscalsustainability widened sovereign spreads for manyeuro area countries, which reached highs not seensince the launch of the Economic and MonetaryUnion. Bank funding all but dried up in the euroarea, prompting the European Central Bank (ECB)to offer a three-year Long-Term RefinancingOperation (LTRO). Bank lending conditions movedsideways or deteriorated across a number of advanced economies. Capital flows to emergingeconomies fell sharply. Currency markets werevolatile, as the Japanese yen appreciated and manyemerging market currencies depreciatedsignificantly.

Figure 2. Recent Economic Indicators

Sources: Haver Analytics; and IMF staff calculations.Not all economies are included in the aggregations. Aggregates are computed on thebasis of purchasing-power-parity (PPP) weights unless noted otherwise.Argentina, Brazil, Bulgaria, Chile, China, Colombia, Estonia, Hungary, India, Indonesia,Latvia, Lithuania, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Romania, Russia,South Africa, Thailand, Turkey, Ukraine, and Venezuela.Australia, Canada, Czech Republic, Denmark, euro area, Hong Kong SAR, Israel, Japan,Korea, New Zealand, Norway, Singapore, Sweden, Switzerland, Taiwan Province of China,United Kingdom, and United States.PPP-weighted averages of metal products and machinery for euro area, plants andequipment for Japan, plants and machinery for the United Kingdom, and equipment andsoftware for the United States.

123

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Quarterly World Growth(percent; quarter over quarter,annualized)

11:Q3200708Sept. 2011WEO forecast09

3035404550556065

Merchandise Exports(percent; three-month movingaverage (3mma) over previous3mma, annualized)

Dec.1120070809

-40-30-20-1001020

Real Gross Fixed Investment(annualized percent change frompreceding quarter)

of which:machineryand equipment

-80-60-40-20020406080

Manufacturing PurchasingManagers' Index (PMI)(index)

11:Q320070809Nov.1120070809

Emergingeconomies

Advancedeconomies

Emergingeconomies

Advancedeconomies

10101010

WorldEmergingeconomies

Advancedeconomies

708090100110120

0102030405060708001002003004005006007008000500100015002000250004000800012000160002000080100120140160180200220240260

Figure 3. Recent Financial Market Developments

Sources: Bloomberg Financial Markets; and IMF staff calculations.Vertical lines on each panel correspond to May 10 and November 30, 2010.ECB = European Central Bank; LIBOR = London interbank offered rate; OIS = overnightindex swap.VIX = Chicago Board Options Exchange Market Volatility Index, a measure of the impliedvolatility of options on the S&P 500 index; VXY = JPMorgan emerging markets impliedvolatility index, a measure of the aggregate volatility in currency markets.TOPIX = Tokyo stock price index; MSCI = emerging markets stock price index.Bilateral exchange rates against the U.S. dollar (increase denotes depreciation).APSP = average petroleum spot price.

Commodity Price Indices(Jan. 1, 2010 = 100)Exchange Rate Indices(Jan. 1, 2010 = 100)

EuroYenRenminbiSwiss francSterlingMetalsFoodRaw materialsCrude oil (APSP)Gold

Government Bond Spreads(two-year yield spreads overGerman bunds, basis points)

Jan.10

Greece

Jan.11

IrelandPortugalSpain