International Economic Update

Positive Outlook Distorted by Downside Risks
November 9, 2009

While the economic outlook has generally improved, there remain some causes for concern. Early third quarter GDP shows some countries growing robustly, while there are still negative signs for others. Though some financial indicators show dramatic improvement, credit remains tight and most central banks have yet to unwind monetary stimulus. Signs of an economic recovery are out there, but they keep getting blurred by downside risks.

Early Second-Quarter Growth and Industrial Production

Only a few countries have released third quarter GDP so far, with varied results (Table 1). Early third quarter data showed continued improvement in Asian economies. The United Kingdom, however, came in lower than expected in the third quarter and continues to contract. Monthly industrial production data showed mixed results for the advanced economies (Chart 1). The euro area has posted gains in each of the past four months, and Japan has posted gains since February. In Canada industrial production has leveled off, with almost no change between July and August. The United Kingdom, meanwhile, took a hit in August before improving some in September. The Office of National Statistics warned that the U.K. could face a double dip recession if it experiences another shock or loss of confidence, given how weak its anticipated recovery is. Industrial production is very strong in most of the emerging markets (Chart 2).

Table 1
Early Third Quarter Growth Gives Uncertain Outlook
Percent, Quarter-over-Quarter Annualized
United Kingdom
South Korea
*Preliminary estimate.
**Percent, year over year.
Source: National Statistics Offices.

The Asian economies in particular have made great strides. In his speech at the San Francisco Federal Reserve, Chairman Ben Bernanke declared that "Asia appears to be leading the global recovery" and went on to suggest that Asian economies should build up domestic demand, rather than rely on an export-led recovery. It appears that many advanced economies are benefitting from the strength of the Asian countries through their trade flows. The United States saw its exports to Asia increase 9 percent in the second quarter, while Japan saw its increase 21 percent. During the same period, the United Kingdom's exports to Asia rose 22 percent and the euro area's grew 16 percent.[1]

Trade and Exchange Rates

It appears that in the advanced economies international trade bottomed out in the second quarter (Chart 3). Net exports helped boost GDP growth in Japan and the euro-area economies in second quarter, as Japan reversed some of its massive export losses, and declines in euro-area imports far outweighed declines in exports. There is some concern in the euro area, however, that exports may suffer because of the euro's recent appreciation against the dollar, making exports less competitive (Chart 4). The dollar had been making large gains beginning in July 2008 as investors sought refuge in relatively safe assets. Since March, however, risk appetite has recovered, and investors are seeking higher returns again.

Monetary Policy and Inflation

Inflation remains very low—in fact, negative for the advanced economies of the OECD (Chart 5). There was a small uptick, however, for headline inflation in August. Commodity prices continue to rise, having grown 61 percent over the past eight months.[2] Interbank lending spreads have come down significantly from October levels, signaling improved financial conditions (Chart 6). However, credit remains stagnant across the euro area and the United Kingdom, both for consumer and corporate lending.

The balance sheets of the European Central Bank and the Bank of England remain high, indicating that they have not backed off from quantitative easing measures yet. The major central banks have kept interest rates unchanged, while a few smaller ones have begun to raise policy rates. In a surprise move in late August, the Bank of Israel raised rates, citing inflation concerns. The Bank of Australia raised rates by 25 basis points on Oct. 6, due to its improved economic outlook. The Bank of Norway also raised rates on Oct. 28, becoming the first European central bank to do so. Norway has a low unemployment rate (3.2 percent as of August), and as the fifth largest oil exporter, it has benefited from the recent rise in commodity prices.


Mixed signals are obfuscating the recovery picture. The Asian economies continue to show robust growth into the third quarter, while the United Kingdom is still contracting. Industrial production in the euro area continues to rise, but there is some question as to what effect its currency appreciation will have on exports. Inflation has stayed low, although commodity prices are rapidly rising. Interbank rates have recovered, but lending is still dormant. Finally, a few central banks have found that conditions sufficiently warranted raising interest rates, but at the major central banks, rates remain low and balance sheets are still large. The coming months should help clarify the situation as more countries release their third quarter data and we are better able to determine who is recovering and who is lagging behind.

—Patrick Roy

  1. Data is from, Monthly International Statistics database. Quarterly trade values are computed in U.S. dollars as the average of monthly values. Due to exchange rate fluctuations over this time, export growth in the United Kingdom and the euro area is inflated relative to what it would be denominated in their local currencies.
  2. Based on S&P Goldman Sachs Commodity Index.
About the Author

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


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