Wall Street History

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Wall Street History

04/22/2011

Global Economic Outlook

The International Monetary Fund recently gave its latest “World Economic Outlook” (WEO), some details of which follow.

--Global growth forecast at around 4 ½ percent for both 2011 and 2012.

--High unemployment and commodities prices pose major social concerns.

--More progress urgently required on fiscal and financial repair and reform.

--Work needed to rebalance global demand, address imbalances.

The global economic recovery is gaining strength…but unemployment remains high, and risks of overheating are building in emerging market economies.

High commodity prices present new policy challenges, while old challenges – fiscal and financial repair and reform and the rebalancing of global demand – remain work in progress.

“Fears have turned to commodity prices,” said Olivier Blanchard, Chief Economist at the IMF. “Commodity prices have increased more than expected, reflecting a combination of strong demand growth and a number of supply shocks. These increases conjure the specter of 1970s-style stagflation, but they appear unlikely to derail the recovery,” he told a press conference in Washington.

In many emerging market economies, demand is robust and overheating is a growing policy concern. Developing economies, particularly in sub-Saharan Africa, have also resumed fast and sustainable growth. But the IMF said new risks have emerged:

--Rising food and commodity prices pose a threat to poor households, adding to social and economic tensions, notably in the Middle East and Africa.

--Oil prices have shot up because of unrest in the Middle East. The WEO said disruptions so far would have only mild effects on economic activity but, given falling spare oil production capacity, risks are on the downside.

--The IMF said that the earthquake and tsunami in Japan had exacted a terrible human toll but that its global macroeconomic impact would be limited.

The IMF said many old policy challenges remain unaddressed even as new ones arise. In advanced economies, weak sovereign balance sheets and still-moribund real estate markets continue to present major concerns, especially in certain euro area economies.

Strengthening the recovery in advanced economies will require keeping interest rates low as long as wage pressures are subdued, inflation expectations are well anchored, and bank credit is sluggish. At the same time, public spending needs to be placed on a sustainable medium-term path by implementing fiscal consolidation plans and entitlement reforms, supported by stronger fiscal rules and institutions.

The WEO said this is particularly urgent in the United States to stem the risk of globally destabilizing changes in bond markets. “To make a sizable dent in the projected medium-term deficits, broader measures such as Social Security and tax reforms will be essential.” *

*[Ed. note: This particular statement, made April 11, is interesting in light of S&P’s call on April 18 to attach to the U.S. a “negative outlook” in terms of dealing with its fiscal problems.]

It said that in Japan, the immediate budgetary priority was to support reconstruction. Once reconstruction efforts are under way and the size of the damage is better understood, attention should turn to linking reconstruction spending to a clear fiscal strategy for bringing down the public debt ratio over the medium term.

In the euro area, despite significant progress, markets remain apprehensive about the prospects of countries under market pressure. For them what is needed at the euro area level is sufficient, low-cost, and flexible funding to support strong fiscal adjustment, bank restructuring, and reforms to promote competitiveness and growth. More generally, greater trust needs to be reestablished in euro area banks through ambitious stress tests and restructuring and recapitalization programs.

The challenge for many emerging and some developing economies is to ensure that present boom-like conditions do not develop into overheating over the coming year. Inflation pressure is likely to build further as growing production comes up against capacity constraints, with large food and energy price increases raising pressure for higher wages.

United States 2.8%
Euro Area 1.6%
 Germany 2.5%
 France 1.6%
 Italy 1.1%
 Spain 0.8%
United Kingdom 1.7%
Canada 2.8%
Japan 1.4%
China 9.6%
India 8.2%
Russia 4.8%
Brazil 4.5%
Mexico 4.6%

On the issue of oil….

Oil remains the most important source of primary energy in the world, accounting for about 33% of the total. The two other fossil fuels, coal and natural gas, account for 28% and 23%. The analysis says that renewable sources of energy are in a rapid growth phase, but they still account for only a small fraction of primary energy supplies….

Threats to oil supplies, including geopolitical risks, imply that oil scarcity could be more severe and may materialize in large and abrupt changes. The negative global growth effects would be correspondingly larger.

In addition, it is uncertain whether the world economy can adjust as smoothly to increased scarcity as the researchers assume, given redistribution and sectoral shifts. When oil becomes more scarce, it implies losses to labor and owners of capital in high oil-intensity sectors.

Increasing production in low oil-intensity sectors will eventually offset some of these losses, but there could be resistance to change. Another concern is larger negative growth effects because oil scarcity may not just lead to higher costs and lower productivity levels but also hold back productivity growth.

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