Global economy continues to grow, risks increase
Global real economy is intact. Political toolbox is nearly empty.
It its most recent Economic Outlook from September 2011, the International Monetary Fund (IMF) said that the global economy has entered a dangerous new phase. Global economic activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing. More shocks that could unsettle the global economy are not implausible. The IMF has attempted to portray those shocks in a downside scenario, which shows that GDP in the US and Europe could fall by as much as 3.5%. Take away those shocks, which are difficult to pin down analytically, and the IMF assumes in its basic scenario that global economic growth will continue, though at a slower rate. It expects global GDP growth of 4% in both 2011 and 2012. World trade is expected to increase by 7.5% in 2011 and 5.8% in 2012.
For the United States, IMF researchers only expect modest growth of 1.5% in 2011 and 1.8% in 2012 - far below the normal rate of the country, whose population is also growing. Other analysts expect the US to slip back into recession. Either way, the US will relinquish its role as a driving force of the global economy, a fact that will leave its mark on the rest of the world, given that the US makes up about one quarter of global GDP. But it is not US industry that is holding back the country’s economy - that sector is doing well and is gaining ground fast on world markets. Its good performance is not lifting the overall economy though, as industry only creates a relatively small portion (about 12%) of the country’s economic value. The problems in the US economy are more down to excessive government debt and the resulting need for consolidation, to an ailing property market with house prices that continue to fall, to unemployment that is unusually high and persistent by American standards, and to low consumer confidence that results in low consumer spending and a high personal savings rate. The US needs to save more over the long term, but weak consumer demand is inhibiting that at the moment.
In Japan, the natural and nuclear disasters that hit the country in March continue to affect economic development. The IMF predicts that the country’s economic output will decrease by 0.5% this year, though it has been improving with each quarter. After sharp drops of 3.7% in the first quarter and 2.1% in the second quarter of 2011, significant growth is forecast for the third quarter. Japanese industry is benefiting from strong, dynamic demand from other Asian countries, but the strong yen is hurting the ability of Japanese exporters to compete on pricing. In the coming year, the IMF expects relatively strong growth of 2.3% for Japan. In terms of domestic prices, the deflationary trend of recent years will continue, with negative inflation rates of -0.4% in 2011 and -0.5% in 2012. Unemployment is already low and will drop further to 4.9% in 2011 and 4.8% in 2012.
The eurozone remains a problem child of the global economy as its economic performance continues to deteriorate. The IMF forecasts growth of 1.6% for 2011 and just 1.1% for 2012. After an upbeat start to the year with first-quarter GDP growth 3.1% higher than in the previous quarter, GDP growth dropped to just 0.6% in the second quarter. Growth is expected to continue to be sluggish in the second half of this year and to slow even more next year. This will have grave consequences for Germany’s export-oriented industry. Although newly industrialised countries are increasingly responsible for export growth, Europe is still the dominant force behind German exports. Over 70% of German exports go to Europe, over 60% go to the European Union and over 40% to the eurozone. Nine out of ten of Germany’s biggest export partners are in Europe. Eight out of ten of Germany’s biggest import partners are in Europe. The eurozone’s biggest problem is weak political leadership and the loss of confidence that this has triggered. There are still no convincing political answers to the sovereign debt crisis in the eurozone, and the austerity measures brought about by this excessive sovereign debt are reducing overall demand.
Newly industrialised countries are continuing to provide an element of stability for the global economy. While their economic development is being slowed by the anaemic growth of most highly developed industrialised countries, they are still in a strong positive trend. At the head of the pack are the BRIC countries, which will continue to provide lasting impetus for the global economy this year and next. The IMF expects 2011 GDP growth of 3.8% for Brazil, 4.3% for Russia, 7.8% for India, and 9.5% for China. In 2012 it is forecasting growth of 3.6% for Brazil, 4.4% for Russia, 7.5% for India, and 9% for China. German industry is very well represented in all these markets. The BRIC countries and other newly industrialised countries are steadily growing in importance, both as destinations for German exports and as production locations.