Following the release of the 2011 survey by the International Comparison Program for new purchasing power parity benchmarks, the World Economic Outlook’s estimates of purchasing power parity weights and GDP valued at purchasing power parities have been updated.
The ICP’s purchasing power parities indicate how many units of a country’s local currency are needed to buy a comparable basket of goods and services valued in a common currency (taken for convenience to be the US dollar). The ICP provides purchasing power parities for a benchmark year (2011 in the most recent release). Outside the benchmark year, the IMF extrapolates purchasing power parities using relative inflation rates based on GDP deflators.
A higher weight in global purchasing power parity GDP and stronger real GDP growth for emerging market and developing economies (compared with that of advanced economies) has meant that global growth is now estimated to have been higher in recent years. Average global growth during 2011-13 was 3.6 per cent, some ¼ percentage point higher than the level based on the old weights.
Similarly, over the forecast horizon, global growth in 2014-2015 is projected to average 3.7 per cent, about 0.1 percentage points higher than the level based on the old weights. The growth rates in world output based on market exchange rates would work out to 2.4 per cent in 2013, to 3 per cent average over 2014-2015.
The 2011 ICP revisions suggest a significantly higher purchasing power parity weight—compared with that implied by the 2005 survey—for emerging market and developing economies as a group and individually for many countries. Emerging market and developing economies’ total weight in global purchasing power parity GDP in 2013 has risen from 51 per cent as derived from the 2005 survey to 56 per cent based on the 2011 survey. Conversely, the share of advanced economies as a group has fallen. In EMDs, the share of BRIC group has gone down from 55 per cent to 53 per cent, while that of other EMDs has gone up from 45 per cent to 47 per cent between 2005 and 2011.
When weighted by GDP at market exchange rates, emerging market and developing economies account for less than 40 per cent of global GDP, reflecting their more limited purchasing power in international markets. For instance, China and India are estimated to account for 16 per cent and 6.7 per cent of global GDP in 2013 in purchasing power parity terms, respectively, but only 12.7 per cent and 2.5 per cent in current US dollars.
The global growth projection for 2014 has been marked down by 0.3 per cent to 3.4 per cent (relative to April WEO), reflecting weak first quarter, particularly in the United States, and a less optimistic outlook for several emerging markets, according to the World Economic Outlook Update: July, released by IMF. With somewhat stronger growth expected in some advanced economies next year, the global growth projection for 2015 remains at 4 per cent.
Global growth is expected to rebound from the second quarter of 2014, as some of the drivers underlying first quarter weakness, such as the inventory correction in the United States, should have only temporary effects, and others should be offset by policies, including in China. But the first-quarter setback will only be partially offset.
Downside risks remain a concern. Increased geopolitical risks could lead to sharply higher oil prices. Financial market risks include higher-than-expected US long-term rates and a reversal of recent risk spread and volatility compression. Global growth could be weaker for longer, given the lack of robust momentum in advanced economies despite very low interest rates and the easing of other brakes to the recovery. In some major emerging market economies, the negative growth effects of supply-side constraints and the tightening of financial conditions over the past year could be more protracted.
Overall, global growth, which is now computed using the new 2011 purchasing power parities of the International Comparison Program, is projected to rise to 3.4 per cent in 2014 and 4 per cent in 2015.
In China, the authorities have resorted to limited and targeted policy measures to support activity in the second half of the year, including tax relief for small and medium enterprises, accelerated fiscal and infrastructure spending, and targeted cuts in required reserve ratios.
In India, growth appears to have bottomed out, and activity is projected to pick up gradually after the post-election recovery in business sentiment, offsetting the effect of an unfavorable monsoon on agricultural growth.
In Brazil, tighter financial conditions and continued weakness in business and consumer confidence are holding back investment and dampening consumption growth.
In Russia, investment is expected to remain weaker, given geopolitical tensions.
Growth in South Africa is expected to stay sluggish as a result of electricity constraints and labor conflicts.