Global growth is projected to remain subdued at slightly above 3 percent in 2013, the same as in 2012. This is less than forecast in the April 2013 World Economic Outlook (WEO), driven to a large extent by appreciably weaker domestic demand and slower growth in several key emerging market economies, as well as a more protracted recession in the euro area. Downside risks to global growth prospects still dominate: while old risks remain, new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the United States leads to sustained capital flow reversals. Stronger global growth will require additional policy action. Specifically, major advanced economies should maintain a supportive macroeconomic policy mix, combined with credible plans for reaching medium-term debt sustainability and reforms to restore balance sheets and credit channels. Many emerging market and developing economies face a tradeoff between macroeconomic policies to support weak activity and those to contain capital outflows. Macroprudential and structural reforms can help make this tradeoff less stark.

Financial market volatility increased globally in May and June after a period of calm since last summer. In advanced economies, longer-term interest rate and financial market volatility have risen. Peripheral euro area sovereign spreads have widened again after a period of sustained declines. Emerging market economies have generally been hit hardest, as recent increases in advanced economy interest rates and asset price volatility, combined with weaker domestic activity (see below) have led to some capital outflows, equity price declines, rising local yields, and currency depreciation.

Global growth increased only slightly from an annualized rate of 2 percent in the second half of 2012 to 2 percent in the first quarter of 2013 (Figure 1): CSV, instead of accelerating further as expected at the time of the April 2013 WEO. The underperformance was due to three factors. First, continuing growth disappointments in major emerging market economies, reflecting, to varying degrees, infrastructure bottlenecks and other capacity constraints, slower external demand growth, lower commodity prices, financial stability concerns, and, in some cases, weaker policy support. Second, a deeper recession in the euro area, as low demand, depressed confidence, and weak balance sheets interacted to exacerbate the effects on growth and the impact of tight fiscal and financial conditions. Third, the U.S. economy expanded at a weaker pace, as stronger fiscal contraction weighed on improving private demand. By contrast, growth was stronger than expected in Japan, driven by consumption and net exports—the latter helped by the 20 percent depreciation of the yen (in real effective terms) since late 2012.

Turning to forecasts, growth in the United States is projected to rise from 1 percent in 2013 to 2 percent in 2014 (Table 1). The projections assume that the sequestration will remain in place until 2014, longer than previously projected, although the pace of fiscal consolidation will still slow. Private demand should remain solid, given rising household wealth owing to the housing recovery, and still supportive financial conditions.

In Japan, growth will average 2 percent in 2013, moderating to about 1 percent in 2014. The stronger forecast for 2013 than previously projected reflects the effects of recent accommodative policies on confidence and private demand, while the somewhat softer forecast for 2014 reflects the weaker global environment.

The euro area will remain in recession in 2013, with activity contracting by over percent. Growth will rise to just under 1 percent in 2014, weaker than previously projected, in part due to the persistent effects of the constraints discussed above and the expected delays in policy implementation in key areas, but also due to base effects from the delayed recovery in 2013.