International Economic Update
Trends Show Both Optimism and Uncertainty for Year Ahead
December 16, 2010
Data indicate that global recovery from the financial crisis has been largely successful in 2010. Growth in advanced economies has surpassed expectations on the back of monetary and fiscal stimulus, while emerging economies continue to expand at a rapid pace.
At the same time, sovereign debt default fears have flared up in peripheral euro area economies, unemployment remains high in most major advanced economies and emerging economies face the possibility of rising inflation and asset bubbles as investors seek to capitalize on favorable growth prospects. These scenarios pose obstacles to recovery, but moderate growth in advanced economies and robust expansion in emerging economies is expected to continue in 2011.
GDP Growth and Unemployment
Gross domestic product (GDP) growth rates in advanced economies for 2010 exceed consensus forecasts made one year ago, despite flagging growth in the latter half of the year. In the third quarter, real GDP expanded 5 percent in Japan, driven by government incentives to increase consumer activity as well as higher corporate spending. Germany saw 3.9 percent growth from the previous year, relying on a strong export market and boosting growth figures for the euro area. Third-quarter GDP growth in Canada reached 3.4 percent from one year ago, while 2010 GDP growth met or exceeded expectations in the U.S., U.K., Italy, and France (Chart 1).
Concerns over rising national debt figures have prompted budget cuts and austerity programs in most advanced economies, where unemployment remains high. In light of fading fiscal stimulus and stagnant unemployment, 2011 GDP growth forecasts in advanced economies remain moderate despite stronger-than-expected performance in 2010.
Meanwhile, emerging economies remain resilient, and growth rates are expected to cool only slightly in 2011. Year-over-year, third quarter GDP in Brazil grew at 6.8 percent, Russia at 5.3 percent, and China at 9.6 percent.
Euro Area Unsteady Amidst Debt Scare
On Nov. 28, the Irish government accepted a bailout package from the International Monetary Fund (IMF) and the European Union (EU), renewing fears that peripheral euro area economies will default on sovereign debt in contagion (Chart 2). Compared to bank holdings in the entire euro area, Irish sovereign debt is small; however, banks in advanced economies, particularly in Germany and Belgium, are significantly invested in Ireland and would face stress in the case of default (Chart 3). Additionally, debt spreads in Spain and Portugal rose rapidly leading up to Ireland's bailout announcement and remain elevated as the IMF and EU consider how best to maintain confidence in the euro and contain crises in Ireland and Greece.
Inflation and Asset Bubbles in Emerging Economies
Advanced economies have left accommodative policy rates largely unchanged to continue providing liquidity in advanced economies. Given the appeal of high growth rates in emerging economies, investors have aggressively searched for high yields in new markets. Consequently, capital has surged into Brazil, Russia, India and China following the financial crisis.
As a result, headline inflation, the measure of price change for all goods and services in an economy, has climbed. In response, central banks have tightened policy rates to avoid overheating and price instability. Inflation in Brazil increased to a five-month high of 5.4 percent, and Russia saw its highest figure of the year at 8 percent in November. Rates in China and India rose to 4.4 percent and 10.4 percent, respectively (Chart 4; all figures are changes from previous year).
Look for Continued Two-Speed Growth in 2011
In 2010, advanced economies faced the prospect of double-dip recession, but in actuality have outperformed GDP growth forecasts from one year ago. Though unemployment remains high and budget austerity is likely to replace fiscal stimulus, slow recovery from the financial crisis is expected to continue. Growth rates may again surprise on the upside if the euro area sovereign debt fears abate and consumer confidence grows. Emerging economies, with more robust growth, must balance newfound investment attractiveness with sustainable growth as the global recovery continues to unfold.
About the Author
Odom is a research assistant in the Research Department of the Federal Reserve Bank of Dallas.