In January of 2009, the International Monetary Fund (IMF) forecasted that advanced economies would not exit the global recession until the middle of 2010. However, these economies posted, on average, GDP growth of about 2% in 3Q 2009, and growth in emerging economies accelerated to about 8% in 2Q and 3Q – 2% higher than forecasted. Additionally, global trade and industrial production are on a sharp recovery path.
Although most projections show a continuation of positive growth in 2010, questions about the strength and sustainability of the recovery remain. To provide an economic outlook for the new year, the Carnegie Endowment hosted a distinguished panel of the heads of the economic forecasting unit at their respective organizations. The discussion provided a number of insights and perspective on the global economic outlook that many may find of interest; to some, a surprise. For instance, the consensus was that Asia would lead the global recovery, and that high unemployment and high sovereign debt levels would be experienced in the developed economies. The panelists included Hans Timmer of the World Bank; Jörg Decressin of the IMF; Phillip Suttle of the International Institute of Finance (IIF); Desmond Lachman of the American Enterprise Institute (AEI), and Uri Dadush of the Carnegie Endowment. The panel moderator was Pieter Bottelier of the Carnegie Endowment.
First up, Dadush of the Carnegie Endowment highlighted several factors behind this stronger-than-expected recovery:
§ Most importantly, unprecedented stimulus and financial rescue efforts in advanced economies largely worked.
§ Asia, where fundamentals like financial sectors and public budgets were healthy before the crisis, recovered rapidly, helping pull the rest of the world to recovery.
§ The world succeeded in avoiding large-scale contagion effects, including sovereign debt crises, competitive exchange rate devaluations, and trade wars.
Next, Timmer from the World Bank noted that, despite these improvements, production levels across the world remain 7-10 % below pre-crisis levels, unemployment in many countries is around 10 percent, and fiscal positions have deteriorated significantly: ultimately, there is still a long way to go.
What to Expect for 2010
Suttle of the IIF, and Dadush offered optimistic outlooks for 2010, citing several supporting factors:
§ The growing role of emerging economies, which did not suffer a financial crisis and remain fundamentally strong, will support the global recovery.
§ The corporate sector, particularly non-financial firms in the United States, reacted quickly and aggressively to the crisis, registering better than expected earnings in 2009. As a result, a significant turnaround is expected soon in their labor, inventory, and investment demand, with employment expected to improve by the middle of 2010.
§ Policy will remain supportive. Much of the fiscal stimulus has yet to enter the market, with only one third of the U.S. stimulus package spent so far. Financial rescue is being withdrawn gradually in response to market signals. In addition, as risk appetites increase, low policy interest rates will be much more effective in increasing consumer and investment demand.
The AEI’s Lachman, however, presented a grimmer picture, projecting a very subdued recovery with a return to recession possible in the United States:
§ With unemployment close to 10 percent in advanced economies, low wage and income growth will depress consumption. The weak private sector will struggle to support the recovery.
§ Banks, still suffering from huge losses, will be forced to cut credit. Additionally, regional banks in particular will likely be hit by commercial property market weaknesses.
Advanced Versus Emerging Economies
Major differences have emerged between advanced economies and emerging markets. Emerging economies, which are increasingly driven by domestic growth factors rather than exports, are now contributing significantly more to growth and investment than advanced countries.
§ Decressin of the IMF noted that both groups saw growth from 2007 to 2009 contract by approximately 6 percent, falling from 3 percent to -3 percent in advanced countries and from 8 percent to 2 percent in emerging markets. They remained “cyclically” coupled, though the underlying growth rate in emerging markets is much higher.
§ At the same time, there was much heterogeneity among the emerging economies. While Asia—and China in particular—has led the recovery, Eastern Europe (with the exception of Poland) has been less successful, with little sign of recovery. Latin America paints the most diverse regional picture, with countries like Brazil faring relatively well and others, like Chile, lagging behind.
§ Decressin argued that as long as the differences between the advanced economies, which are weighed down by both structural and cyclical weaknesses, and emerging ones persist, capital will continue to flow to emerging markets.
Panelists agreed that China must evolve to fit this new paradigm. China is already or may soon be the world’s second largest economy and the largest trader and emitter of C02. Bottelier argued that China must embrace this new role and take a more prominent leadership role in crucial areas such as global trade reform and climate change. Domestically, China should pursue structural reform and a more flexible exchange rate. Dadush noted that a flexible and appreciated exchange rate is in China’s interest, as it will help rebalance the economy towards consumption and reduce long-run inflationary pressure. However, placing external imbalances at the center of policy dialogue is misguided.
Policy Solutions
Speakers outlined the challenges that policy makers face in the coming year, and offered suggestions for solutions:
§ Fiscal policy should remain stimulative in the near term, but panelists agreed that leaders need to begin engineering a shift in demand from public to private sources. Timmer stressed that while fiscal stimulus can provide a short term boost, it is not an effective growth strategy.
§ Similarly, Suttle commented that monetary policy should remain supportive, but given the unprecedented nature of recent policy—particularly quantitative easing in the United States and UK—leaders must exercise caution.
§ More should be done to promote credit. Banking sector lending remains depressed and credit must be available once demand picks up.
§ Policy should accommodate the permanent shift in the structure of the world economy caused by the crisis, and support demand moving from traditional industrial powers to emerging markets. Timmer noted that these shifts—if managed with long-term considerations like climate change in mind—have the potential to create new sectors, such as “green industries,” that will help drive future growth.
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