Special Report: 2011 World Economy in Review

In January 2011 Euromonitor International released a Special Report on Global Economic Prospects in 2011. Here we revisit this report to see how the themes identified in 2011 played out.

1. World growth will slow in 2011; rebalancing remains the key

We said: “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.”

  • World growth did indeed slow in 2011 but to an even greater extent than predicted in January. Latest projections for global real GDP growth for 2011 as a whole stand at 3.9%;
  • Real GDP growth in advanced economies is now expected to be just 1.6% in 2011 (against 2.2% forecast in January) and 6.3% in emerging and developing countries (against 6.4% forecast in January);
  • The Chinese government has begun the work of rebalancing the Chinese economy to encourage greater private consumption, reducing reliance on exports through its 12th Five Year Plan announced in March 2011. Objectives include expanding consumption by reducing wealth disparities, lowering carbon emissions and promoting knowledge-based, high-tech industries.

Real GDP Growth: 2005-2012

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Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and World Economic Outlook/UN/national statistics

Note: Data for 2011 onwards are forecast. Forecasts made in December 2011.

2. Commodity markets should be relatively stable with upward pressure on prices being moderate

We said: “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.”

  • As expected, food prices continued to remain high – with some exceptions, such as poultry and palm oil. The IMF Food Price Index was 22.8% higher in January-November 2011 compared to the same period in 2010;
  • Metal prices moderated in the second half of the year. The IMF Metal Price Index fell for four consecutive months between August and November 2011. In November 2011 the prices of copper, lead, nickel, tin and zinc were all down on November 2010;
  • There was an unforeseen oil price spike in April 2011 due to fears of supply disruptions stemming from social and political unrest in the Middle East and North Africa.

Oil prices: January 2009-November 2011

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Source: Euromonitor International from EIA

3. Unemployment will continue to be a problem in the developed world

We said: “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.”

  • Global unemployment has been a key issue facing the global economy in 2011, and has emerged as a weak link in the recovery – particularly in advanced world economies. With the economic outlook deteriorating in the second half of 2011, it now looks like the unemployment rate in advanced economies will not return to 2008 levels until 2018;
  • As predicted in January, we are still expecting the US unemployment rate to remain above 8.0% until 2014. We now expect Spain to struggle with a jobless rate above 15.0% and Ireland over 10.0% until 2017 – two years later than we thought in January.

Unemployment Rate in G7 Economies: 2008/2011/2015

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Source: Euromonitor International from International Labour Organisation Note: Data for 2011 and 2015 are forecasts.

4. Tighter fiscal policies will slow the recovery in the most advanced economies

We said: “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.”

  • Sovereign debt and government budget deficits have dominated the news in 2011, particularly in the eurozone. The state of government finances in advanced economies is widely recognised as the key challenge facing the global economy.
  • The IMF’s latest estimates indicate that G7 budget deficits will be cut to a very slightly improved figure of 7.9% of GDP in 2011 with a continued downwards trend expected to 2016 when they are expected to reach 4.2% of GDP.

Government Budget Deficits in Selected Eurozone Economies: 2011

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5. Growth of world trade will moderate but global imbalances remain wide

We said: “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.”

  • OECD figures for the first three quarters of 2011 show growth of 6.8% in world trade over the same period in 2010. A strong Q4 performance seems highly unlikely with sluggish growth in the EU in particular affecting global demand, meaning that the annual 2011 figure when it is available is unlikely to be higher.
  • As expected performance varied from country-to-country. In the first three-quarters of 2011 OECD countries saw growth in trade of 6.0% over the same period in 2010, compared to 8.2% in non-OECD countries.

World trade: 2009-2011

2005 US$ billions/% growth

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Source: OECD Note: Data for 2011 are annualised and based on first three quarters. 2011 growth is calculated as growth in first three quarters 2011 over the same period of 2010.

What will 2012 bring?

The world economy faces exceptional – perhaps even unprecedented – uncertainty as it enters 2012. The rebound in output among developed countries has proven feeble, yet fiscal austerity is being launched, especially in the eurozone. The collective austerity of developed economies will likely bring on one of the most severe fiscal contractions in many years. These effects will be partly offset by developing countries, although growth is moderating as global financial conditions deteriorate.

The world economy will grow by 3.8% in real terms in 2012, down from 3.9% in 2011 and 5.2% in 2010. The slowdown is a consequence of financial instability and fears of sovereign risk, which threaten to spread beyond a few European economies. In other developed countries (such as the USA) policy indecision exacerbates uncertainty. As a result, stimulus programmes launched in 2010-2011 are being replaced by austerity measures. The outlook is brighter for developing countries. External demand is weakening but in most emerging economies domestic demand should propel growth until the world economy becomes healthier. However, the outlook for developing countries is not risk-free. A few countries with especially open economies and dependence on demand in developed markets could struggle. Policy makers in larger developing countries generally have more flexibility than is available in the advanced world, meaning that the possibility of a soft landing is more likely than a hard one.

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Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and World Economic Outlook/UN/national statistics

Note: Data for 2011 and 2012 are forecasts made in December 2011.