by Don Alexander, MBA
Associate, RSD Solutions Inc.
The global economy has entered a dangerous new phase as the signs of an emerging recovery on 2010 have given way to a decline in confidence and the emergence of downside risk. A number of shocks have hit the international economy from which it has not fully recovered: including the earthquake in Japan, political unrest in Arab countries, the fallout from political gridlock in Washington over deficit reduction and the unresolved sovereign debt crisis in Europe. The structural problems facing crisis-hit advanced countries have proven more intractable than expected, but emerging markets have been the bright spot despite concerns about vulnerability to shocks.
The IMF World Economic Outlook (WEO) projections indicate that global growth will fall to 4% in 2011 from 5% in 2010. In the advanced countries, growth is expected to be an anemic 1 ½% in 2011 from 2% last year. This assumes that European policymakers can contain the sovereign debt crisis and US policymakers can reach a compromise on fiscal consolidation. Emerging market should be able to maintain a solid pace of 6%. The advanced countries will be paced by the US at 1.8%, Europe at 1.1% and Japan at 2.3% for 2012. While China and India will pace emerging market countries at 9% and 7.5%, respectively.
The report noted two lingering risks that could have severe negative consequences for global growth. The first is the debt crisis in Europe spirals out of policymakers control and spills over into the global economy. The US might be vulnerable if political gridlock remains over fiscal consolidation and the housing market remains in the doldrums from underwater mortgages.
The report noted that further progress was needed structural reforms for the global economy could return to a more stable growth trajectory. First, private demand must take over from public demand. On this issue, many countries have made progress, but the advanced countries have been the laggards. Second, economies with large external surpluses must shift to reliance on domestic demand, while those with large deficits must do the opposite. All countries must do more to advance rebalancing and to hedge against potential downside risks.
The optimism that greeted a rebound in the global economy in 2010 has given way to caution in 2011 as downside risks emerged. The lack of prompt action by policymakers to address key issues could lead to another year of anemic economic prospects.
For more on the IMF’s views follow the link: www.imf.org/external/pubs/ft/survey/so/2011/RES092011A.htm
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