International Economic Update

The Good, the Bad and the Recovery
October 5, 2009

There are positive signals in the international data, although trouble spots still exist. Emerging markets were showing strong growth in the second quarter. Some advanced economies began growing as well. However, unemployment is rising in most countries, and credit growth in Europe is stagnant. Inflation remains low (negative in some cases) in advanced economies.

Strong Second-Quarter Numbers

Emerging economies showed a dramatic turnaround in growth during the second quarter (Table 1). While growth in Mexico remained negative, the rate of decline slowed appreciably. Though strong trade ties with China and India may have been a factor for many of the Asian economies, it is not clear that this was the main driving force. Most of those countries saw growth in private and government spending that outpaced growth in net exports.

Table 1
GDP Growth Recovers in Emerging Markets
Average past
4 quarters
Average past
4 quarters
  Hong Kong
NOTE: Percent Q/Q, annualized (*percent year/year)
SOURCE: National Statistics Offices.

Some advanced economies saw positive growth in second-quarter data as well (Chart 1). Though the euro area had negative growth overall, Germany and France both had positive growth, at 1.3 percent and 1.1 percent annualized rates, respectively. In most other countries, like the United Kingdom, the rate of decline slowed considerably.

A look at the contributions to GDP helps explain the disparity among advanced economies. The euro area and Japan both saw increases in domestic consumption, albeit a very small increase in the euro area. Net exports in both economies, which had been hard hit over the preceding four quarters, also showed a dramatic turnaround in second quarter 2009. The increases in net exports are due in large part to the strength of the emerging Asian economies relative to their own domestic markets. Investment in fixed capital remains a drag on all the advanced economies, while the drawdown in inventories in the euro area and Japan is a positive sign for those countries.

Credit Growth Remains Stagnant in Europe

One area for improvement remains the European credit markets, where lending does not seem to have recovered (Chart 2). The European Central Bank (ECB) and the Bank of England have used quantitative easing to inject more money into banks. These measures do not seem to have increased lending to a large extent, however, because much of the money has been deposited back into those very same central banks.[1]

While this may suggest that European banks are still reluctant to lend, an alternative explanation is that demand for loans is simply low. Data from the ECB Euro Area Bank Lending Survey suggest that the number of banks tightening lending standards has declined dramatically over the past two quarters (Table 2). In the same survey, banks are generally reporting a net decrease in demand over the past three months.

Table 2       
ECB Bank Lending Survey
Home loans (percent)
Consumer loans (percent)
Business loans (percent)
Banks tightening credit standards 2009:Q3
Banks tightening credit standards 2009:Q1
Banks reporting increase in demand over past 3 months
Banks reporting decrease in demand over past 3 months

Employment Continues to Decline

Employment growth remained negative throughout advanced and emerging economies in the second quarter (Charts 3 and 4). This is not surprising given that employment is typically a lagging economic indicator. Within the euro area, countries like Spain (with an unemployment rate of 18.5 percent)[2] and Ireland (12.5 percent) have seen a large run-up in unemployment, while others, such as Germany (7.7 percent) and France (9.8 percent), with already high unemployment rates, had only small increases. The United Kingdom (7.8 percent) and Japan (5.7 percent) have experienced moderate increases in unemployment thus far.

Inflation Uncertainty

Headline inflation numbers are negative on a year-over-year basis in the euro area (–0.2 percent) and Japan (–2.2 percent) and low in the United Kingdom (1.6 percent). These numbers largely reflect the decline in commodity prices since last summer; core inflation numbers have remained comparatively steady (although Japan's core inflation numbers have been negative for the past decade). Commodity prices had been hard hit by the fall in global demand, although they have recovered some from their lows at the end of last year (Chart 5).

There is a great deal of uncertainty over what path prices may take, ranging from speculation of deflation to rampant inflation. The uncertainty derives from the unclear outlook for the global economy. High unemployment and low capacity utilization mean there is already a large amount of underutilized resources available. If demand remains low in the medium term, deflation is a possible outcome. However, we have also had a sustained period of low interest rates. If economic expansion occurs faster than policymakers are able to unwind the fiscal and monetary stimulus, we may see inflation grow beyond our comfort level.


Second-quarter GDP growth was better than expected in most cases. Many countries grew, while the remainder saw their pace of decline slow. However, it may be too early to say if we are in the midst of a global recovery. Investment in the advanced economies remains weak, employment is still declining and credit is not growing in Europe. The International Monetary Fund (IMF) expects that any recovery will be slow, given experiences from past financial crises.[3] While productivity takes awhile to rebound, the IMF reports that there usually is not a permanent loss to output growth in the medium term. Overall, the international economic data give reason for cautious optimism.

—Patrick Roy

About the Author

Roy is a research analyst in the Research Department at the Federal Reserve Bank of Dallas.


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