By Flowers, Andrew
International Monetary Fund
Protectionism--Forecasts and Trends
United States Economic Conditions--Economic Aspects
United States Economic Conditions--Forecasts and Trends
Economic Recovery--Economic Aspects
Economic Recovery--Forecasts and Trends
Global Economy--Economic Aspects
Global Economy--Forecasts and Trends
Economies around the world are struggling to emerge from the most severe global recession since the Great Depression. Following the recession of 2007-09, the International Monetary Fund (IMF) projected global output, to rise 4.8 percent in 2010 and then 4.2 percent in 2011 (see chart 1). While 2010 saw growth higher than many analysts expected, and the forecast for 4.2 percent growth in 2011 is surely a welcome one, the key question is whether this growth is sustainable.
There are several factors that pose downside risks to the forecast. For one, the recovery is uneven--emerging and developing economies' growth is strong, but the outlook for most developed economies is sluggish. Other concerns are the ongoing risk of diverging economic policies in response to countries being at different stages of recovery. These diverging policies relate to issues such as trade protectionism and exchange rate manipulation or a repeat of the spring 2010 European scare, whereby fiscal strain in one country morphs into a broader financial market contagion, for example. The road to recovery for the global economy looks like an uneven one in 2011.
Not all recoveries are created equal
The frequently cited research of Carmen Reinhart and Kenneth Rogoff, found in their book This Time Is Different, makes the case that economic expansions following recessions induced by a financial crisis are more painfully slow compared to "normal" postrecession growth. The slower growth is caused by the dele-veraging of households, companies, and (sometimes) governments- (Deleveraging is the paying down of debt.) In the two decades following such a recession, they estimate that growth is 1.5 percentage points lower than it would be otherwise.
As a stark representation of this growth differential, chart 1 shows the IMF projected 2011 growth rates of the advanced and emerging economies. Advanced economies are forecast to grow by 2.2 percent and emerging economies should soar ahead with 6.4 percent growth. Among the advanced economies, the euro area and Japan are currently the most sluggish, with growth rates forecast at 1.7 percent and 1.5 percent, respectively. Among the world's large economies, China's expected 2011 growth leads the way at 9.6 percent, but India is not far behind at 8.4 percent. Brazil, after a very strong recovery in 2010 of over 7 percent, should moderate to just over 4 percent.
These estimates of faster growth in emerging economies are not surprising for two reasons. First, emerging economies tend to have higher trend growth rates, given the greater marginal returns on investment and the "catch-up" phenomenon of importing technology from advanced economies. Their lower domestic wages also allow them to more readily attract capital. Second, the recent financial crash originated in the advanced economies--particularly the United States, United Kingdom, and the euro area--and then grew into a global recession with heightened risk aversion, decreased world trade, and the subsequent collapse of demand. These hard-hit Western countries are now particularly burdened with weakened financial systems. Their financial systems were most exposed to the now-soured securities that precipitated the freezing of credit markets and failure, or near-failure, of several sys-temically important institutions.
But aside from these reasons, the growth differential between advanced and emerging economies going forward is still worrisome. While the nature of an imbalanced recovery is no surprise, it is the degree of asymmetry in growth rates that poses a problem for global economic policymaking.
Greece spillover a slippery problem
One of the underlying causes for the asymmetry of growth is, as previously mentioned, the debt overhang in advanced economies following the financial crisis. Arguably the most significant event that altered the global outlook this past year was the fiscal crisis in Europe. …