IEEJ: October 2011 All Rights Reserved

Special Bulletin
A Japanese Perspective on the International Energy Landscape (59)September 22, 2011Downward Revisions to “World Economic Outlook” and Downside Risks
Ken Koyama, PhD
Chief Economist
Managing Director
The Institute of Energy Economics, JapanOn September 20, the International Monetary Fund released the latest version of its“World Economic Outlook (WEO)”. The WEO, revised every quarter, is positioned as a reference
standard regarding present and future conditions of the world economy.
The latest version, as expected earlier, made a substantial downward revision to the world
economic growth projection. The world economy is now projected to grow 4.0% both in 2011 and2012. The projected growth rate is not necessarily low, but is down 0.3 percentage point from theprevious projection given in June for 2011 and down 0.5 point for 2012. Growth projections for
major countries have been lowered. Particularly, substantial downward revisions have come to U.S.
and European growth projections.
U.S. economic growth is now projected at 1.5% for 2011, down 1.0 point from theprevious forecast, and 1.8% for 2012, down 0.9 point. For Europe (the euro area), economic growthis forecast at 1.6% for 2011, down 0.4 point, and 1.1% for 2012, down 0.6 point. The IMF has thus
made substantial downward revisions to European and U.S. growth projections, leading to adownward revision for global economy.
It may be needless to say that factors behind the downward revisions include various
problems surfacing in the European and U.S. economies since August and serious relevant fears
about the future course of the world economy. In the United States, turmoil over whether to raise thefederal debt ceiling in early August triggered a chain of negative reactions including a major debt
rating agency’s downgrade of the U.S. government bonds rating, a decline in confidence in the U.S.
dollar as a key currency, and a New York stock market fall, aggravating fears about the future U.S.
economy. Market players are concerned that the U.S. economy could suffer another dip after
managing to recover from a recession following the September 2008 Lehman Shock.
In a sense, the European economy may be in a more serious situation. The resurging Greekdebt crisis has led to growing fears of default on Greek government bonds, casting a dark cloud over1

IEEJ: October 2011 All Rights Reserved

the future of the euro area economy. As the other euro area countries and the European Central Bank
have decided to implement provision of additional financial assistance to Greece in October, themarket has seemingly recovered stability at the moment. But many analysts still deny an end to theGreek default crisis, as it is uncertain whether Greece could implement austere budget and economic
measures as a precondition for the additional aid to achieve the fiscal consolidation targets.
Furthermore, discussions on the Greek problem have highlighted various contradictions andvulnerabilities as fundamental problems regarding the euro economy integration. Under the common
currency of the euro, monetary policy discretions to meet national conditions are restricted. It isgrowing politically difficult for major euro-area countries to expand financial support for Greece andother weaker nations at the cost of taxpayers’ money under their respective severe economic andfiscal situations. Particularly, it is uncertain how Germany as the center of the euro-area economy
would try to defend the euro economy.
Present prescriptions are seemingly based on scenarios where emergency loans are
combined with an austere budget policy to overcome a crisis. But market developments are
unpredictable. The Greek problem could affect other European countries with sovereign debt
problems and banks holding Greek government bonds, spilling over to the entire euro area and eventhe entire world economy. Some countries could choose to secede from the euro area in the face ofdebt crises. Ultimately, downside risks exist to severely shake the entire euro area.
We must pay attention to an indication that a basic condition for the above IMF outlook ispolicy management to avoid the worst scenarios for the euro area and U.S. economies. If downside
risks emerge in Europe or the United States, the IMF may have to substantially revise economic
growth projections downward again. The IMF itself is not necessarily optimistic, as indicated by its
title of a chapter in its latest report: “Risks Are Clearly to the Downside.” The report calls forkeeping close watch on future developments.
As a matter of course, the future course of the world economy is a variable exerting great
influences on the supply/demand balance and prices in the international energy market. As for theenergy supply/demand balance, the International Energy Agency has adopted the IMF outlook as a
key basic condition for working out a world oil demand outlook in its monthly oil market report. In
this sense, the latest downward revisions to growth projections (and possible future downward
revisions) are expected to considerably affect the world oil demand outlook. In addition to theabovementioned influences on the energy supply/demand balance, the WEO revisions could exert
financial impacts on energy prices, particularly crude oil prices, by affecting stock and currency
markets and risk tolerance in overall financial markets. The benchmark West Texas Intermediate
crude oil futures price, now in an $85-90/barrel range (with the Brent crude futures price at around$110/barrel), could deviate substantially from the present range depending on future world economy
developments, particularly the emergence of serious downside risks. In anticipating the future energy

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IEEJ: October 2011 All Rights Reservedmarket, we may have to keep close watch on risk problems in the world economy, particularly theEuropean and U.S. economies.

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