By Olivier Blanchard

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Today we published the World Economic Outlook Update.

But first, let me talk about the elephant in the room, namely Greece.

The word elephant may not be right: As dramatic as the events in Greece are, Greece accounts for less than two percent of the Eurozone GDP, and less than one half of one percent of world GDP.

Of course, we continue to hope for and work toward a positive solution by which Greece remains in the Eurozone. There is little question that Greece is suffering and may suffer even more under the scenario of a disorderly exit from the Eurozone. But the effects on the rest of the world economy are likely to be limited. Mechanical linkages, through trade or finance, are small. And while one should always worry about contagion, and "unknown unknowns,’’ so far these have not materialized. The world economy has withstood the stress tests of the last two weeks fairly well.

There is however a larger lesson to be drawn. The post crisis world is a world with high debt. It does not take much for debt dynamics to get out of control. We are likely to see, and we have to be ready for more episodes of this kind, be it for states, or for financial institutions, or for firms.

Leaving Greece aside, general evolutions are unfolding very much as forecast in April. Moderate growth continues, with an improving recovery in advanced economies, and a slowdown in underlying growth in emerging market and developing economies. Forecasts for the world economy are for 3.3 percent this year, and 3.8 percent next year.

Going around the world, the main unexpected development was the announcement of a negative growth rate for the first quarter in the United States. By itself, it can account for more than half of the revision of 0.2 percent to the world economy forecast for 2015. The question, when the numbers came out, was whether this was an indication of underlying weakness of the U.S. economy. Now that the fog has largely cleared, the response is that it was not. Fundamentals are still solid, and the U.S. recovery is on track.

Other country developments worth noting:

In advanced economies, recovery in the Eurozone is more solidly anchored, including in the much of the periphery. Spain’s growth rate for example is now forecast to exceed 3 percent. Despite a strong first quarter, Japan’s growth for 2015 has been revised slightly down, but remains positive, at 0.8 percent.

In emerging economies, we have left unchanged our forecast for China, 6.8 percent for 2015, but with perhaps more uncertainty than before. The puncture of what had clearly become a stock market bubble may have some limited effect on spending. But, for the moment, the slowdown in growth is primarily led by a slowdown in real estate investment, a development we see as basically desirable. In constructing forecasts for China, our assumption continues to be that the Chinese authorities will indeed allow a moderate slowdown of growth, while also using monetary and fiscal policies if needed to prevent too sharp a slowdown. Thus, for 2016 we forecast growth of 6.3 percent, and 6.0 percent in 2017.

Brazil’s growth has been revised down, and is now forecast to be -1.5 percent. Low confidence, together with tighter policies aimed at reestablishing confidence, are combining to yield a recession in the short run. Russia’s growth is forecast to be -3.4 percent, a bit better than forecast in April, on the back of some improvement in commodity prices and confidence, but still clearly very bad.

Turning to risks: The nature and distribution of risks is very similar to that in the April World Economic Outlook. Disruptive asset shifts, and lower liquidity in some markets, remain a relevant downside risk. They may materialize when the Fed exits the zero lower bound, but other events could also trigger financial instability for some time. On the good news side, the risk of deflation has decreased: pass-through of lower oil prices is now largely in the past. And, despite low actual inflation, inflation expectations have remained anchored.

Looking beyond these short run forecasts, I see three main macroeconomic issues: 

First, how fast advanced economies can eliminate the legacies of the crisis, in particular debt overhang, not only for governments but also for corporations and households. Greece and Puerto Rico are reminders of the dangers of high debt. But, even when debt is sustainable, high debt is a brake to spending and requires low interest rates to sustain demand and output. And these, we have learned, can in turn lead to central banks running again into the zero lower bound, and to excessive risk taking.

Second, whether advanced economies can significantly increase growth in the medium term. Aging populations and low total factor productivity are combining in many countries to deliver low potential growth. Low growth, especially when combined with high inequality, can easily lead to fiscal, social, and political tensions. The challenge is whether and how structural reforms can improve upon this underlying trend.

Third, whether the slowdown in growth in a number of emerging market economies reflects temporary or permanent factors. The steady decrease in growth in Latin America over the last five years for example suggests that high growth in the 2000s came in part from increasing commodity prices and loose international financial conditions. The question is then how best to manage the transition to an environment of stable or even declining prices, and tighter financial conditions.

To summarize: Moderate growth continues. Measures to increase demand in the short run, and supply in the medium run remain of the essence.