2011-2012 GDP Outlook
Outlook is for steady but slower
GDP growth in 2011 and 2012
After the sharp growth deceleration of 2008 and the contraction in 2009, global GDP is estimated to have increased 3.9 percent in 2010. The pickup in growth among high-income countries (a 6.2 percentage point improvement in growth rates) was more marked than in developing countries (5 percentage point increase in growth rates); but at 7 percent, growth in developing countries was more than twice as strong as in high-income countries. As a result, low and middle-income countries contributed almost half of global growth (46 percent) in 2010. Moreover, all of developing country growth was due to increased domestic demand.
Growth in both high-income and developing countries is expected to slow somewhat in 2011, mainly reflecting the easing already observed in the second half of 2010, before picking up again toward mid 2011, settling at rates close to their longer-run potential. Global GDP is projected to increase by 3.3-and 3.6 percent during 2011 and 2012, with developing economies expanding by 6-or more percent in each year, more-than twice the 2.4 and 2.7 percent growth expected for high-income countries. Unfortunately these growth rates are unlikely to be fast enough to eliminate unemployment and slack in the hardest-hit economies and economic sectors.
The continued recovery should be supported by further strengthening of capital flows to developing countries in 2011 and 2012 GDP. However, carry-trade flows are expected to decline, as monetary policy tightens in high-income countries and interest rates rise. Partly as a result, total inflows to developing countries will rise less quickly — at just over 10 percent in 2011 and under 5 percent in 2012. Because nominal GDP is expected to rise faster (10 and 12 percent), despite rising in dollar terms flow are projected to decline as a share of GDP, to around 3.7 percent in 2012.
A combination of lower commodity prices (compared with 2008) and a rebalancing of trade volumes in favour of high-income countries, has served to reduce global imbalances; and this trend is not expected to be reversed over the forecast period. The absolute value of the current account balances of the world’s economies has declined from a peak of 5.6-to about 3.3 percent of global GDP in 2010. Most of the decline reflects smaller imbalances in high-income countries (the current account deficit in the United States narrowed from 6-to 2.7 percent of GDP between 2005 in 2009, before bouncing back to 3.5 percent of GDP in the third quarter of 2010). Imbalances in developing countries have also declined from 1.5 percent of global GDP in 2006 to about 1.1 percent in 2010.
Looking forward, global imbalances are expected to decline marginally in 2011 and 2012, as whole economy savings in high-income countries continues to rise. Any tendency for private savings rates in high-income countries to decline due to cyclical improvements in the economy are expected to be countered3 by higher public-sector savings as fiscal deficits decline and by an offsetting tendency for private savings to rise as interest rates increase with the withdrawal of monetary stimulus.
Alternatively pre-crisis production levels could be dated mid 2007, the point when industrial production in high-income countries began to decline. The August 2008 date has the advantage of being more directly related to the financial crisis, and preceding the point in time when activity collapsed. Indeed, arguably the process of until-then orderly unwinding of domestic and global imbalances was unfinished in August 2008 and both trade and industrial production were above their equilibrium levels.
Activity in the United States is expected to continue to be characterized by strong domestic demand growth, but relatively disappointing GDP growth, as the economy continues to deal with high-unemployment and the shrinking of an overgrown housing sector. Notwithstanding the 9 percent real-effective depreciation of the dollar since January 2009, and stronger exports, leakages, both in the form of imports and capital outflows, continue to stymie efforts to grow the economy through demand stimulus. Boosted by the additional stimulus measures passed late in 2010, GDP is projected to expand 2.8 percent in 2011 and 2.9 percent in 2012.
In high-income Europe, the recovery will continue to face headwinds from the uncertainty surrounding sovereign debt in several countries as well as planned fiscal tightening on a wider scale. Nevertheless, growth in the larger economies is expected to remain close to- or slightly above past trends, helping to slowly re-absorb unemployment and spare capacity. Among those high-income European countries most deeply affected by the crisis, growth is not expected to be strong enough to reduce unemployment very rapidly, partly because of the intense restructuring that some of these economies are undergoing. Overall, Euro Area GDP, after expanding 1.7 percent in 2010, is projected to slow to 1.4 percent in 2011 and pickup to 2 percent in 2012, reflecting both a gradual tightening of fiscal policy and the region’s reliance on bank lending, as opposed to equity and bond flows, to finance private-sector investment.
After a solid third quarter, Japanese growth is expected to contract in the fourth quarter of 2010, but an anticipated rebound in exports should see the economy renew growth in the first quarter of 2011. Overall, growth for 2010 is estimated at 4.4 percent, but is expected to moderate to 1.8 percent in 2011 and advance by 2 percent in 2012.
In-depth discussions of prospects in the different developing regions, including country-specific forecasts, are available in the regional annexes.
With the exception of the Europe and Central Asia region, most developing regions are projected to enjoy strong recovery, with growth close to underlying potential and output gaps close to or approaching zero. This apparent homogeneity masks important differences within regions, reflecting among other factors, countries’ exposure to international capital flows, and their reliance on remittances, tourism and commodities. The following paragraphs examine the prospects of developing countries from this perspective.
On average, middle-income countries underwent a much more pronounced cycle than low-income countries, with GDP for middle-incomes growing only 1.9 percent in 2009, before rebounding 5.9 percent in 2010. Among those economies whose underlying structure was most distorted during the boom period and whose households and banking sectors are most burdened by bad debt,4 output gaps are more-than 4 percent of GDP and unemployment remains endemic. To a large extent this reflects developments in 6 middle-income countries that experienced very pronounced booms during the period 2003-2007 and whose economies are currently undergoing severe restructuring.5
All of these countries are located in the Europe and Central Asia region. Partly as a result, the region’s aggregate growth has been slow, with GDP increasing only 4.7 percent in 2010 after declining 6.6 percent in 2009 (see earlier table: Global outlook in summary). High levels of household indebtedness and widespread unemployment have held back consumer demand, while banking-sector consolidation and large quantities of bad-loans are limiting new lending. In addition, tepid growth and financial restructuring in high-income Europe has meant a weak recovery in foreign capital inflows, export revenues and remittances for developing Europe and Central Asia. In the five countries undergoing the most intense restructuring, output fell 8.2 percent in 2009, and rebounded by just 1.7 percent in 2010 (see table below). Including Russia in the tally, output collapsed by 8 percent in 2009, but the growth rebound was stronger (3.1 percent) as Russia benefitted from the recovery in oil prices and state revenues.
Excluding the six most affected economies, the growth impact was less severe for Europe and Central Asia, with positive growth (1.6 percent) in 2009, and expectations for increases in a high 4-percent range through the projection period. Output gaps for these countries are slightly positive in contrast to the much larger gaps for the restructuring economies (see second figure on previous page). Indeed, even by 2012, output gaps in the restructuring economies are expected to remain high, with growth coming in at less than half its pre-crisis rates.
Developing country GDP developments by economic category
Real GDP growth -
4 The countries in the Europe and Central Asia that are undergoing significant restructuring include: Albania, Armenia, Azerbaijan, Bulgaria, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Lithuania Moldova, Macedonia, FYR, Romania, Russian Federation, Ukraine and Uzbekistan.
5 The 6 developing countries undergoing the most serious restructuring include: Bulgaria, Kazakhstan, Lithuania, Romania, Russian Federation, and Ukraine.
While most countries experienced a bounce back in capital flows during 2010, GDP in the 9 countries6 that attracted the bulk of these flows surged 8.4 percent in 2010, after rising 3.7 percent in 2009.7 The bounce-back in growth was strongest among current-account deficit countries within the group (7.6 percentage points) as renewed capital inflows eased domestic demand growth constraints (particularly investment and private consumption related).
Both groups have seen output gaps close rapidly, though gaps in current account deficit countries remain moderately negative. Growth in both groups of countries is expected to remain strong, albeit easing from the very fast rates posted in 2010. In the baseline projections continued strong capital inflows are projected to push GDP in each group to within 1/2 of a percentage point of potential by 2012. However, if capital inflows accelerate further and growth escalates to above baseline projections, already existing inflationary pressures and asset price bubbles could build further — especially among those countries that continue to resist upward pressure on their currencies. For others, continued appreciation will cut into domestic competitiveness, reducing net exports and help to mitigate inflationary pressures
6 Nine countries (Brazil, China, India, Indonesia, Malaysia, Mexico, South Africa, Thailand, and Turkey) received 95% of portfolio equity and 74% of short-term debt flows and almost half of bond flows in 2010.
7 Maldives, Lesotho, Costa Rica, Venezuela and Kiribati also appreciated sharply for diverse reasons — including being pegged to an appreciating middle-income currency and high inflation.
The crisis affected both low– and middle-income resource-dependent countries less dramatically than other countries. For low-income exporters (many of which in Sub-Saharan Africa), GDP growth eased by about a percentage point into 2009, rebounded to 5.3 percent in 2001 and is anticipated to sustain rates of about 6.5 percent throughout the forecast period, as strong commodity prices continue to support incomes and government finances. The crisis slowed activity in resource-dependent middle-income countries more than like low-income countries mainly as these economies were more financially integrated with the world economy, and were characterized by larger manufacturing sectors. Moreover, many low-income resource-rich countries are still expanding production at a rapid rate, a process that continued despite the crisis. Middle-income resource-dependent economies are expected to grow 4.5-and 4.6 percent in 2011 and 2012, moderately above their average growth of 4.1 percent during the pre-boom period 2000-2004.
The impact of the crisis on low-income remittance and tourism dependent countries was limited, with growth declining from 5.6 to 4.3 percent between 2008 and 2009. Partly as a result, economy wide capacity utilization is already back to long-term trend levels. Tourism dependent economies were harder hit by the crisis, as declining incomes and uncertainties in tourism-originating countries yielded lower tourist volumes and/or reduced spending.
The rebound in remittances-dependent economies is expected to be modest over the next two years, as employment conditions in high-income countries improve only slowly. Tourism is also not expected to bounce back very forcefully in most countries, as prospects in originating countries strengthen only slowly.
The impact of the great recession on fragile countries8 was relatively small, with growth falling off from 3.8 percent in 2008 to 3 percent in 2009.
Assuming that domestic conditions continue to improve, growth is anticipated to average 5 percent per year or more over 2010-2012, well above the 3 percent average growth recorded during the pre-boom period. Of course, should political conditions in one or more countries deteriorate, growth could suffer markedly.
8 A fragile state is defined as an IDA-eligible (International Development Association), low-income country or territory (including those countries which may currently be in arrears) with a Country Policy and Institutional Assessment (CPIA) score of 3.2 or below or those countries without a CPIA score. CPIA rankings are revised annually and are available at http://www.worldbank.org/ida/idalloc.htm.
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Portugal faces calls to seek an EU bailout
Portugal is coming under rapid pressure to follow in the footsteps of Greece and Ireland and seek a European Union and International Monetary Fund bailout immediately. There is so much pressure in Portugal, but will they be like Greece and Ireland and be in denial?
The Euro currency will continue to suffer in the hands of Greece, Portugal, Spain, Italy and Ireland who are `all` in `deep` financial difficulty as first stated here in January 2008. Who will leave the euro currency first? What future as the Euro? Watch this space!
Without `continuous quantitative easing` where would the world be? Yes, there is still more to come!
Spending our way out of worldwide recession will take years to pay back--and create a lot of pain.
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