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Why the global economy could be turning a significant corner, in six charts

Ayhan Kose's picture

2018 will likely mark a turning point for the global economy. For the first time since 2008, the negative global output gap – defined as the difference between the levels of actual output and output if operating at full capacity – is expected to close. As the output gap closes in advanced economies, central banks are likely to normalize monetary policy after a decade of exceptional easing. With this anticipated withdrawal of stimulus by advanced economies, emerging market and developing economy policymakers need to remain alert to the potential for adverse spillovers.

Output gaps are closing

In 2018, for the first time since 2008, the negative global output gap is expected to be closed.

Global output gap
Source: World Bank staff estimates.
Notes: Output gaps calculated using multivariate filter. Global, regional, and group output gaps are calculated using constant 2010 U.S. dollar GDP as weights. The sample includes 15 advanced economies (Australia, Canada, Denmark, Finland, France, Germany, Italy, Japan, New Zealand, Norway, Spain, Sweden, Switzerland, United Kingdom, and United States) and 23 EMDEs (Argentina, Bolivia, Brazil, Bulgaria, Chile, China, Colombia, Croatia, Hungary, India, Indonesia, Kazakhstan, Malaysia, Mexico, Peru, Poland, Romania, Russia, Serbia, South Africa, Thailand, Turkey, and Vietnam). 2018 GDP is forecast. Dashed lines are 95 percent confidence interval bounds computed from the Kalman smoother state variances. Global lower and upper bounds are obtained as GDP-weighted averages of individual country lower and upper bounds.

Recovery from crisis near complete in advanced economies

The recovery from the 2008 crisis in advanced economies is eventually expected to be complete by 2018 as output gaps close.

Output gap in advanced economies
Notes: Dashed lines are 95 percent confidence interval bounds computed from the Kalman smoother state variances. Global lower and upper bounds are obtained as GDP-weighted averages of individual country lower and upper bounds.

EMDE output gaps expected to remain negative on average

On average, emerging market and developing economy (EMDE) output gaps are expected to be slightly negative with heterogeneity among commodity-exporting and importing countries.

Output gaps in EMDEs
Notes: Dashed lines are 95 percent confidence interval bounds computed from the Kalman smoother state variances. Global lower and upper bounds are obtained as GDP-weighted averages of individual country lower and upper bounds.


EMDE commodity exporters: not fully recovered from commodity price collapse

Emerging market and developing economy commodity exporters have yet to fully recover from the plunge of commodity prices in mid-2014 while among commodity importers, the output gap is expected to close on average.

Output gap in commodty-exporting and -importing




Monetary stimulus likely to be withdrawn in advanced economies

Although output gap estimates are subject to uncertainty, closed output gaps in adavanced economies are likely to trigger further withdawal of monetary stimulus.

Range of output gap estimates in advanced economies

Notes: “EMDE commodity exporters” include Argentina, Bolivia, Brazil, Chile, Colombia, Indonesia, Kazakhstan, Malaysia, Peru, Russia, and South Africa. “EMDE commodity importers” include China, Hungary, India, Mexico, Poland, Romania, Serbia, Thailand, Turkey, and Vietnam.


Monetary normalization may have spillover effects

EMDEs need to be prepared for potential financial disruption due to normalization of policy in advanced economies.

Share of advanced economies with positive output gaps

Notes: Blue bars denote multivariate filter-based estimates. Vertical orange lines indicate one standard deviation error bands. LAC = Latin America and the Caribbean, SSA = Sub-Saharan Africa.

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