Market-Driven Corrections Replace Fading Transitory Policies

Article excerpt

I. GLOBAL ASSESSMENT AND OUTLOOK

In the second quarter of 2010, the global economic recovery entered its growth deceleration phase in the worldwide business cycle. The transitory fi scal and monetary stimuli are fading and market-driven corrections are expected to dominate global economic growth. Future gains on output and jobs will depend on real factors that drive private investment and consumption, not on excessive government spending and near-zero interest rates that created liquidity traps.

Looking at high-frequency indicators, e-forecasting 's global leading economic index-a composite index of 37 countrywide leading indicators that tracks economic conditions seven to nine months in advance-rose by 0.5 percent in June, its 16th monthly increase in a row. However, its six-month growth rateimportant in signaling turning points-declined for the fourth month in a row from its cycle peak of 14 percent in February 2010 to 7.9 percent in June 2010.

The signals from e-forecasting 's country leading indicators display a change in direction of growth in all economic blocs from North America to Latin America, Europe, Africa, the Middle East, and Asia. In particular, the combined leading indicator of the high-fl ying emerging nations of the BRIC group-Brazil, Russia, India, and China-rose by 0.4 percent in June, the slower pace of advance in 18 months. More important, BRIC's six-month growth rate declined from its recent peak of 17.6 percent in October of 2010 to 7.8 percent in June 2010.

In several countries, changes in their leading economic indicator have been negative in one or more months in the latest readings. Declines in leading indicators have been posted in the United States, Canada, Mexico, Uruguay, Belgium, Denmark, Finland, France, Greece, Hungary, Italy, Portugal, Spain, the United Kingdom, Japan, New Zealand, Hong-Kong, Taiwan, Turkey, and Dubai.

The short-term evidence of forward leading indicators coupled with increased uncertainty from loss of confi dence in economic policy resulted in trimming our baseline economic forecast this quarter. Market-driven corrections of private and public "bubbles" with long-lasting permanent eff ects have begun to replace fading transitory fi scal and monetary policies. Global output is now forecast to grow by 3.5 percent in 2011 and 3.8 percent in 2012, lower than the projection of 4 percent for 2011 and 4.2 percent for 2012, which was made in the previous quarter.

In addition, the risk for a double-dip worldwide recession has increased substantially refl ecting the probability of policy developments that restrain private business activity such as fi scal consolidation by tax hikes. Historically, consumers and businesses do not respond to low interest rates following corrections in asset prices and unusually high levels of unemployment. Thus, upholding a zero interest rate monetary policy is a refutable eff ective economic stimulus. It may actually produce unintended adverse consequences in the foreign exchange market when monetary policy is not fully coordinated worldwide

II. SHORT-TERM INDICATORS AND FORECASTS

The baseline forecast incorporates major fi ndings of the World Economic Survey conducted in the third quarter of 2010 by the German Ifo Institute and the Paris-based International Chamber of Commerce. About 1,100 executives from 116 countries have indicated that the world's economic climate continued to improve in the third quarter of 2010. The recent overall readings of the worldwide survey are consistent with a continuation of the global recovery but at a slower pace than in 2009 and in the fi rst half of 2010. The major fi ndings of the third quarter's survey are as follows:

* Worldwide, executives evaluated the current economic situation, third quarter of 2010, favorably with overall business conditions at satisfactory levels. They found economic activity in their countries to be much better than in the third quarter of 2009. …

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