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Global economy update

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COMMENTS

3 February 2011 14:52

Until events in Egypt brought political risk back on to investors' radar screens, there had been signs of some cautious optimism regarding the world economy.

In the IMF's latest forecast update (released on 25 January) to its World Economic Outlook (WEO), the Fund noted stronger than expected global growth in the second half of 2010, thanks to consumption doing better than forecast in the US and Japan. The IMF also upped its forecast for global growth for this year. After growing by an estimated 5% last year, the world is predicted to grow by 4.4% this year and 4.5% in 2012. (PPP weights for countries; on a market exchange rate basis, the IMF thinks world growth was 3.9% last year, and forecasts 3.5% and 3.6% for 2011 and 2012, respectively). 

The WEO update says that the long-running gap in growth rates between advanced and emerging economies will persist: advanced economies are forecast to grow at 2.5% this year and next, while growth in the developing world is pegged at four percentage points faster. We're still living in a divided world economy.

Set against the depth of the preceding downturn, growth rates of 2.5% for the developed world are relatively weak. They will also do little to bring down unemployment. But given the previous degree of uncertainty about when any return to growth would eventuate, and taken together with the continued good growth performance of emerging markets, the prospects for global growth have allowed some increase in confidence.

This change in mood was picked up by attendees at the recent Davos meetings. See for example these two blog posts by the FT's Martin Wolf, where he notes that even Nouriel 'Dr Doom' Roubini has become less pessimistic. Notably, the world's bankers were also feeling much more sure of themselves than they were at last year's event.

For all that, the January update to the IMF's Global Financial Stability Report (GFSR), which was released alongside the WEO update, cautions that despite the improvement in economic growth, 'global financial stability has yet to be secured'. It notes that, in the months after the October 2010 GFSR was released, 'sovereign risks within the euro area have on balance intensified and spilled over to more countries' and that within the euro area 'the adverse interaction between the sovereign and banking risks in a number of countries has intensified'. 

Other risks highlighted in the GFSR update include the relative lack of progress in private sector deleveraging in the developed world, and the ongoing challenges posed by capital inflows in the developing world.

As well as updates to the WEO and GFSR, the IMF produced a January update to its Fiscal Monitor. Here the Fund noted that the average deficit of advanced countries last year was just shy of 8% of GDP, including deficits of 10.6% of GDP in the US and 10.3% in the UK. For emerging economies, the average fiscal deficit last year was about 4% of GDP. This year the Fund estimates that the average advanced economy shortfall will narrow slightly to about 7% of GDP, while in emerging markets it will move closer to 3%. 

Meanwhile, after reaching an estimated 96.5% of GDP in 2010, the IMF reckons that average general government gross debt will breach the 100% of GDP ratio this year. In contrast, the comparable ratio for emerging markets is about 37%, suggesting that the great sovereign risk shift will continue.

Finally, commodity prices have of course been on the rise. Food prices are now back above the level reached in mid-2008, when the world economy faced a food crisis, and some are pointing to food prices as a factor behind the current political unrest. At the same time, oil prices have been testing the US$100/barrel mark, helped by events in Egypt. 

Along with increasingly familiar concerns about food and energy security, rising commodity prices have also raised fears about broader inflationary consequences. To date, the focus has mainly been on emerging economies, where output gaps are either small or have been closed altogether, and where food and energy has a large share of the consumption basket. In the developed world, large estimated output gaps and still-high unemployment are powerful offsets to any inflationary impetus. Still, inflation hawks are noting that both the Bank of England and the ECB are facing inflation rates that are above target: some pessimists have even begun to worry about stagflation again.

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