January 25th, 2011
Econintersect: The latest report from the IMF highlights that recovery from The Great recession is greatly different in different economies. Basically, the emerging world, unburdened by debt, has roared back to high levels of economic activity, while the developed world limps along with anemic GDP growth. The average of all the emerging and developing economies is more than 2 1/2 times the average GDP growth for the advanced economies. The IMF projects this relationship continuing for at least two years.
Two years ago the divergence was even more dramatic. In late 2008 and early 2009 the emerging and developing economies were growing five times faster than the advanced economies.
The following graph summarizes:
Here is the report:
The two-speed recovery continues. In advanced economies, activity has moderated less than expected, but growth remains subdued, unemployment is still high, and renewed stresses in the euro area periphery are contributing to downside risks. In many emerging economies, activity remains buoyant, inflation pressures are emerging, and there are now some signs of overheating, driven in part by strong capital inflows. Most developing countries, particularly in sub-Saharan Africa, are also growing strongly. Global output is projected to expand by 4½ percent in 2011 (Table 1 and Figure 1: CSV|PDF), an upward revision of about ¼ percentage point relative to the October 2010 World Economic Outlook (WEO). This reflects stronger-than-expected activity in the second half of 2010 as well as new policy initiatives in the United States that will boost activity this year. But downside risks to the recovery remain elevated. The most urgent requirements for robust recovery are comprehensive and rapid actions to overcome sovereign and financial troubles in the euro area and policies to redress fiscal imbalances and to repair and reform financial systems in advanced economies more generally. These need to be complemented with policies that keep overheating pressures in check and facilitate external rebalancing in key emerging economies.
The global recovery is proceeding
Global activity expanded at an annualized rate of just over 3½ percent in the third quarter of 2010. A slowdown from the 5 percent growth rate of the second quarter of 2010 was expected, but the third-quarter rate was better than forecast in the October 2010 WEO, owing to stronger-than-expected consumption in the United States and Japan. Stimulus measures were partly responsible for the strengthened outturn, especially in Japan. More generally, signs are increasing that private consumption—which fell sharply during the crisis—is starting to gain a foothold in major advanced economies (Figure 2: CSV|PDF). Growth in emerging and developing economies remained robust in the third quarter, buoyed by well-entrenched private demand, still-accommodative policy stances, and resurgent capital inflows.
During the second half of 2010, global financial conditions broadly improved, amid lingering vulnerabilities. Equity markets rose, risk spreads continued to tighten, and bank lending conditions in major advanced economies became less tight, even for small and medium-sized firms. Nonetheless, pockets of vulnerability persisted; real estate markets and household income were still weak in some major advanced economies (for example, United States), and securitization remained subdued. And, in an echo of last May’s events, financial turbulence reemerged in the periphery of the euro area in the last quarter of 2010. Concerns about banking sector losses and fiscal sustainability—triggered this time by the situation in Ireland—led to widening spreads in these countries, in some cases reaching highs not seen since the launch of the European Economic and Monetary Union. Funding pressures also reappeared, although to a lesser extent than during the summer. One key difference was more limited financial market spillovers to other countries. The turmoil in mid-2010 led to a spike in global risk aversion and a scaling back of exposures in other regions, including emerging markets. During the recent bout of turbulence, markets have been more discriminating: measures of risk aversion have not risen, equity markets in most regions have posted significant gains, and financial stresses have been limited mostly to the periphery of the euro area (Figure 3: CSV|PDF).
The recovery is set to continue…
The baseline projections below assume that current policy actions manage to keep the financial turmoil and its real effects contained in the periphery of the euro area, resulting in only a modest drag on the global recovery. This view reflects the limited financial spillovers observed so far across financial markets and regions, as well as the fact that policy responses following the Greek crisis helped limit its impact on the global recovery in the second half of 2010. The baseline also assumes that policymakers in emerging markets respond in a timely manner to keep overheating pressures in check.
Activity in the advanced economies is projected to expand by 2½ percent during 2011–12, which is still sluggish considering the depth of the 2009 recession and insufficient to make a significant dent in high unemployment rates. Nevertheless, the 2011 growth projection is an upward revision of ¼ percentage point relative to the October 2010 WEO, mostly due to a new fiscal package passed in late 2010 in the United States that is expected to boost economic growth this year by ½ percent. A package with a similar growth impact passed in Japan is expected to sustain a moderate recovery in 2011. And although growth in the periphery of the euro area is marked down for this year, this is offset by an upward revision to growth in Germany, due to stronger domestic demand.
In both 2011 and 2012, growth in emerging and developing economies is expected to remain buoyant at 6½ percent, a modest slowdown from the 7 percent growth registered last year and broadly unchanged from the October 2010 WEO. Developing Asia continues to grow most rapidly, but other emerging regions are also expected to continue their strong rebound. Notably, growth in sub-Saharan Africa—projected at 5½ percent in 2011 and 5¾ percent in 2012—is expected to exceed growth in all other regions except developing Asia. This reflects sustained strength in domestic demand in many of the region’s economies as well as rising global demand for commodities (Box 1).
…and financial conditions in most regions are expected to remain stable
Financial conditions are expected generally to remain stable or improve this year. Bank lending conditions in the major advanced economies are expected to ease further, and bond issuance by nonfinancial firms is also expected to strengthen. Amid generally sluggish recovery and continued high saving in key emerging Asian economies, real yields are likely to remain low through 2011. In the United States, the outlook for Treasury yields is uncertain: a gradually strengthening recovery and fiscal concerns may push up yields, while quantitative easing may hold them back.
Financial stresses, however, are expected to remain elevated in the periphery of the euro area, where market participants are still concerned about sovereign and banking risk, the political feasibility of current and envisioned austerity measures, and the lack of a comprehensive solution. European sovereign peripheral spreads and bank funding costs are thus likely to remain elevated during the first half of this year, and financial turbulence could re-intensify.
Under a baseline scenario in which contagion from turmoil in the euro area periphery is contained, emerging market capital inflows are expected to remain strong and financial conditions robust. Bond issuance by emerging market sovereigns and firms is expected to remain robust in 2011. Low interest rates in mature markets and fairly strong investor appetite will continue to pose upside risks to emerging market flows and asset prices, despite some recent slowdown of inflows. Read more at IMF.org.