International Economic Update,institute

Recovery Continues, Risks Remain
September 24, 2010

The ongoing global recovery remains strong in the emerging economies but has stalled in most advanced economies. Uncertainties in financial markets mar growth prospects in Europe and in other developed economies. There is lack of support for expansion from domestic demand now that the effects of fiscal stimuli set in place at the height of the recession have faded.

Optimism for Emerging Economies

Emerging economies continue to outpace advanced economies in gross domestic product (GDP) growth. In the second quarter, real GDP expanded from the previous year by 8.7 percent in Brazil, 10 percent in India, 10.3 percent in China and 5.3 percent in Russia. A smaller contribution to growth from net exports weighed down Russia's performance. Forecasts from Consensus Economics project solid real GDP growth for these countries in 2010 (Chart 1).

Slow Pickup in Advanced Countries

With few exceptions, the G-7 economies are experiencing reduced or stalled GDP growth, and economic indicators point to the persistence of the slowdown through 2010.[1] Canada is the only economy in the group that has attained prerecession real GDP levels (Chart 2). Canada's growth is sustainable because it is largely supported by strong domestic demand, but its economy remains susceptible to a slowdown in the U.S. due to strong trade ties. Canada now has higher overall employment than before the recession began, and it is the only G-7 economy since the recession's onset whose economic performance has warranted the raising of policy rates.

In the U.S., second-quarter real GDP increased about 3 percent from the previous year. However, some indicators point to a slowdown for the remainder of the year. The labor market has been slow to pick up, and the unemployment rate still lingers close to 10 percent. Second-quarter increases in U.S. trade activity have subsided. July numbers indicate a decline in both real import and export growth from the previous year (Chart 3).

The rebound from the recession in the euro area is tepid, although the recovery is uneven across countries. Germany's real GDP shot up at a year-over-year growth rate of 3.7 percent in the second quarter, while the Greek economy contracted 3.7 percent over the same period.

The August purchasing managers indexes (PMIs) for the manufacturing sector suggests a slowdown for all economies except Canada (Chart 4). In the euro area, the index was at its weakest level in six months, while in the U.K., the index dropped for the third consecutive month. Japan's PMI fell to 50.1, edging close to the contraction level of below 50.[2] In the U.S., the index gained 0.8 points in August, while Canada's PMI jumped from 54 in July to 65.9 in August.

Industrial production data point to a leveling off in the euro area since May, a tapering in the U.K. since March and a slowdown in Japan since April. Monthly production growth is declining in the U.S., dropping from 0.65 percent in July to 0.11 percent in August. The latest available data for Canada show a pickup in growth, from 0.34 percent in May to 1 percent in June.

Inflation remains low in most advanced economies. Inflation rose in the U.K. in the first half of 2010, but July numbers show it has subsided. In the labor markets, the combination of uncertainties of global demand and an intense focus on cost controls has placed downward pressure on labor costs, suggesting that low inflation will persist for the G-7 economies (Chart 5).

Risks Persist in European Financial Markets

The stress tests on European banks released in late July were called into question in September under the suspicion that, for some major banks, the tests underestimated the exposure to sovereign debt. This eroded the confidence that had been restored by the initial results, leading to increased uncertainty over the strength of the banks, and an increase in European interest rate spreads.


Emerging economies are faring well despite the uncertainties coming from the advanced economies. The recovery of most advanced countries seems to have slowed, as indicated by PMIs and industrial production numbers. Because of low inflation, advanced economies are expected to refrain from raising policy rates until economic recovery becomes more firmly established.

—Adrienne Mack, Janet Koech and Anthony Landry

  1. The G-7 refers to the seven largest industrialized nations and consists of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
  2. PMI readings above 50 indicate expansion, and readings below 50 indicate contraction.
About the Authors

Mack is a research analyst, Koech is an assistant economist and Landry is a senior research economist in the Research Department of the Federal Reserve Bank of Dallas.


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