The world economy has emerged from recession but the pace of recovery is slow, uneven and fraught with risks. World output and trade have rebounded faster than initially expected and financial conditions have improved. Nonetheless, developed countries grapple with the consequences of a massive rise in debt, while key players in the developing world attempt to rebalance their own economies. Euromonitor International looks at the world economy’s performance in 2011 in the midst of uncertainty.
World growth will slow in 2011; rebalancing remains the key
World growth in real terms is expected to be 4.2% in 2011, down from 4.7% in 2010. Economic performance, however, will vary widely. Internal and external rebalancing remains the key for a sustainable global recovery. This includes a transition from public to private sector-led growth in developed economies and a shift from external to domestically driven growth in developing economies.
- The developed countries are forecast to grow by 2.2% in 2011 in real terms, down from 2.7% in 2010 with some economies experiencing rather sharp slowdowns. The laggards include periphery members of the eurozone where the dangers of sovereign risk are paramount;
- In emerging and developing economies, the aggregate rate of real growth will be 6.4% in 2011 compared with 7.0% in 2010. The slowdown can be attributed to the fact that several of these economies rely heavily on external demand from the developed world and are also under pressure to reorient their economies toward domestic sources of demand.
Commodity markets should be relatively stable with upward pressure on prices being moderate
- Demand for some of the most cyclically sensitive commodities (notably metals such as aluminium, copper, iron ore, lead, nickel and zinc) could soften in the medium term as the process of inventory replenishment in the manufacturing sector is largely completed. Some food and agricultural commodities may prove to be an exception owing to large scale incidents of wildfires, drought and flooding;
- China’s voracious demand for commodities means that its economic prospects are closely intertwined with the outlook for commodity markets. In 2011, rapid but nonetheless moderating growth in China will not destabilise commodity markets;
- In oil markets, no significant price spikes are anticipated in 2011. Among major oil producers, rates of capacity utilisation are still low, underlining the continuing need for production curbs by OPEC to keep prices in the range of U$70-80 per barrel.
Unemployment will continue to be a problem in the developed world
- Globally, the International Labour Organisation (ILO) estimates that more than 60.0 million lost their jobs in 2008 and 2009 but three-quarters of the newly unemployed live in rich countries. The duration of the jobless problem will also differ between developed and developing countries. In the former countries, it is likely to take much longer to resolve and the ILO does not expect global employment to regain its pre-recession levels before 2015;
- In many industrialised countries the recession can be attributed not only to weak demand but also problems in the real estate market and/or the financial sector and hence last longer. As a result, the US economy, which was lumbered with both a large housing bubble and a financial collapse, will not see unemployment fall below 8.0% until 2014. This will dampen consumer spending which is expected to grow by 3.0% in real terms in 2011. Spain and Ireland encountered similar conditions when their housing bubbles collapsed. Spain will still be struggling with a jobless rate of more than 15.0% in 2015 while Ireland will not see unemployment dip below 10.0% before 2015;
- Employment in emerging economies and developing countries fell during the worst of the recession but the loss of jobs was not as steep as in the developed world. In 2010, the average unemployment rate in emerging and developing countries was about 6.0%, compared with 8.3% in developed countries.
Tighter fiscal policies will slow the recovery in the most advanced economies
- According to the IMF, budget deficits of G7 countries stood at 9.3% of combined GDP in 2010. As stimulus programmes are scaled back and taxes are raised, these deficits will fall. In 2011, the combined deficits of these countries will be cut to 8.0% of GDP and continue their gradual decline in the medium term. However, the deficits will continue to significantly add to the debt of these countries;
- The shift in fiscal policy will be contractionary but the extent is difficult to determine. According to the IMF, on average, fiscal tightening by 1.0% of GDP will produce a 1.0% fall in domestic demand over a two-year time period. Developed countries are most likely to be affected by fiscal consolidation as they experienced the sharpest declines during the recession and borrowed heavily to launch massive stimulus programmes. In the euro area, several countries, including Greece, Ireland, Portugal and Spain, face the risk of sovereign default and have been compelled to adopt harsh forms of fiscal consolidation.
Growth of world trade will moderate but global imbalances remain wide
- World trade fell at a rapid pace during the Great Recession but the recovery was also swift. According to the OECD, world trade contracted by 11.1% in 2009 before rebounding in 2010 when growth was 12.3%. Growth will continue in 2011 but the pace will slow to 8.3%. These aggregate figures, however, obscure important differences in the performance of individual countries and product groups. A full recovery of the global trading system will probably be even more protracted than the admittedly slow recovery in world output;
- The possibility that demand for imports in the USA and Western Europe may be anaemic for several years has crucial implications for developing countries that rely mainly on export-driven growth. It becomes even more important for these countries to engage in some form of external rebalancing so that domestic consumption and investment emerge as more significant ingredients for growth;
- The incidence of protectionist measures has risen since 2008. Central banks, in both developed and developing countries are increasingly active in their monetary policy stance in order to ensure export competitiveness and stimulate growth their economies. China, for example, continues to resist currency appreciation and several other Asian economies are considering the same strategy. This protectionist approach to their currencies, particularly, can hamper growth in international trade.
- In the USA, real GDP is expected to grow by 2.3% in 2011 while Canada’s economy should see gains of 2.7% according to Euromonitor International, while the OECD has projected growth of 2.3% for the Canadian economy;
- The jobless recovery in the USA will continue with unemployment reaching 9.5% in 2011. In contrast, Canada’s unemployment should ease to 7.5% in the same year. Canada’s household balance sheets are much stronger than those of American households and its real estate market has fewer problems. As a result, consumer spending in Canada will be more buoyant than in the USA;
- The USA’s government finances are in a dire state. The general government budget deficit will be 9.7% of GDP in 2011 and gross government debt could exceed GDP by 2012 according to the IMF. The US government must tread carefully when dealing with fiscal imbalances, new financial regulations and a weakened banking sector as policy changes could stymie the feeble recovery. In contrast, Canada’s budget deficit in 2011 will be 2.9% of GDP while net public debt will be 33.5% of GDP.
- Latin American economies should see real growth of 4.0% in 2011. This will be lower than 5.5% real growth witnessed in 2010. Commodity exporters in the region like Brazil, Bolivia, Chile, Colombia and Peru will record real growth of 4.0-6.0% in 2011 thanks to robust demand for commodities, favourable prices and easy access to international finance. Strong commodity demand in emerging Asia (particularly China) will be especially important for these countries;
- The relatively strong performance of Latin American economies is producing a surge in capital inflows to the region. An increase in long-term capital inflows is certainly desirable but policy makers must guard against the dangers of hyperinflation, unjustified currency appreciation and the heightened risk of a boom-or-bust cycle.
- In Western Europe real GDP is forecast to rise by 1.7% in 2011 (after expected growth of 2.0% in 2010) but the eurozone will manage growth of only 1.4%. Greece and Portugal should be the only European countries to remain in recession in 2011 although Italy and Spain will see little or no growth;
- The region’s recovery will be very uneven and domestic demand will remain relatively subdued owing to fears of sovereign risk. Governments in the region are implementing rather harsh austerity programmes which will result in lower consumer spending and higher unemployment levels;
- In the eurozone, the crisis has exposed fundamental shortcomings in the fiscal and financial policy framework. The cross-border dimension of these issues clearly calls for a stronger role at the level of the European Union. Eurozone members will have to refinance or repay €560 billion in 2011 – about €45 billion more than in 2010.
Central and Eastern Europe
- The outlook for the countries of Central and Eastern Europe is as diverse as that for Western Europe. While a few countries managed to avoid a recession and will be propelled by healthy rates of consumer spending in 2011, others such as Bulgaria and Romania must deal with significant imbalances which will slow their recovery. For the sub-region as a whole, real GDP should rise by 3.8% in 2011, up from 3.0% in 2010;
- Real growth in the Commonwealth of Independent States (CIS) should be around 4.6% in 2011 – slightly higher than 4.3% in 2010. Russia’s huge economy dominates overall performance in the CIS and exerts a great influence on the economies of other member states through remittances and other linkages;
- Despite high oil prices, the Russian economy is expected to grow at a relatively modest 4.3% in 2011 in real terms. Economic gains are still driven mainly by policy support but consumption will become a more important determinant in the medium term. The government will encounter problems unwinding its fiscal support because roughly three-quarters of the stimulus measures involving pensions, healthcare and social services were permanent.
Asia Pacific and Australasia
- Asia will continue to lead the global recovery. The IMF predicts real growth of 8.4% for the developing countries of Asia in 2011. Among the region’s industrialised countries, Euromonitor forecasts suggest that Japan will see growth of 1.5% in 2011, down from 2.8% forecast in 2010 while the OECD forecasts growth of 1.7% in 2011. The uncertainty in global markets, a possible slowdown in China and a potential for worsening deflation will result in the moderation of real GDP growth in Japan. Australasia should manage growth of 3.4% during 2011;
- Investors are propelling these gains by betting heavily on Asia’s emerging economies. In 2010, total capital inflows to emerging Asia were four times greater than in 2008. Asia’s two economic giants, China and India, will continue to be important economic drivers, both for the region and the global economy. In 2011, China should see real growth of 9.6% while India will grow by 8.4%. These forecasts are slightly lower than expected rates of growth in 2010;
- In China, an encouraging development is that domestic demand should provide most of the growth impetus in the medium term. The government has vowed to change the structure of the Chinese economy by boosting the share of domestic consumption while reducing the dependence on investment and exports but more aggressive action is needed to realise this goal.
Africa and the Middle East
- The economies of the Middle East and North Africa should grow by 5.0% in real terms during 2011. Growth has been mainly driven by a rebound in oil prices. In 2010, oil prices rose by 28.0% and another increase of 3.0% is expected in 2011. Large-scale programmes of public spending in Saudi Arabia, Qatar, Kuwait and Sudan represent another significant economic driver;
- The prognosis for oil importers in sub-Saharan Africa is also relatively bright. Countries in this part of the region should see their combined real GDP grow at a rate of 5.5% in 2011 according to the IMF. Several factors including a recovery in exports and robust domestic demand will all contribute to a solid performance. Modest gains in the inflow of remittances are also expected;
- South Africa, the largest economy in sub-Saharan Africa, can rely on stronger demand for commodities (mainly in China and other emerging economies in Asia) and a recovery in demand for manufactures in the eurozone which is its largest export market. South Africa should see real growth of 3.5% in 2011.
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