If everything breaks right, the global economy could grow by 4 percent in 2011.

Commentaries on economics and technology.
Jan. 15 2011 7:06 AM

Recovery Ahead?

If everything breaks right, the global economy could grow by 4 percent in 2011.

Graph. Click image to expand.
What's the global economic outlook for 2011?

The outlook for the global economy in 2011 is, partly, for a persistence of the trends established in 2010. That means an anemic U-shaped recovery in advanced economies, as firms and households continue to repair their balance sheets, and a stronger V-shaped recovery in emerging-market countries, owing to their better macroeconomic, financial, and policy fundamentals. It adds up to close to 4 percent annual growth for the global economy, with advanced economies growing at around 2 percent and emerging-market countries growing at about 6 percent.

But there are downside and upside risks to this scenario. On the downside, one of the most important risks is further financial contagion in Europe if the Eurozone's problems spread—as seems likely—to Portugal, Spain, and Belgium. Given the current level of official resources at the disposal of the International Monetary Fund and the European Union, Spain now seems too big to fail yet too big to be bailed out.

The United States represents another downside risk for global growth. In 2011, the United States faces a likely double dip in the housing market, high unemployment and weak job creation, a persistent credit crunch, gaping budgetary holes at the state and local level, and steeper borrowing costs as a result of the federal government's lack of fiscal consolidation. Moreover, credit growth on both sides of the Atlantic will be restrained, as many financial institutions in the United States and Europe maintain a risk-averse stance toward lending.


In China and other emerging-market economies, delays in policy tightening could fuel a rise in inflation that forces a tougher clampdown later. China, in particular, risks a hard landing. There is also a risk that capital inflows to emerging markets will be mismanaged, thus fueling credit and asset bubbles. Moreover, further increases in oil, energy, and commodity prices could lead to negative terms of trade and a reduction in real disposable income in net commodity-importing countries—while adding to inflationary pressures in emerging markets.

Moreover, currency tensions will remain high. Countries with large current-account deficits need nominal and real depreciation (to sustain growth via net exports while ongoing private- and public-sector deleveraging keeps domestic demand weak), whereas surplus countries (especially emerging markets) are using currency intervention to resist nominal appreciation and sterilized intervention to combat real appreciation. This is forcing deficit countries into real exchange-rate adjustments via deflation—and thus a rising burden of public and private debt that may lead to disorderly defaults.

Furthermore, several major geopolitical risks loom, including military confrontation between North and South Korea and the lingering possibility that Israel—or even the United States—might use military force to counter Iran's nuclear weapons program. There are also the political and economic turmoil in Pakistan and the risk of a rise in cyber attacks—for example, in retaliation for criminal proceedings against WikiLeaks.

In the United States, slower private-sector deleveraging—given the fiscal stimulus from the extension of unemployment benefits for 13 months, the payroll-tax cut, and maintenance of current income-tax rates for another two years—could lull policymakers into assuming that relatively large fiscal and current-account imbalances can continue indefinitely. This could generate financial strains over the medium term and protectionist pressures in the short term.

Finally, in the face of political opposition to fiscal consolidation, especially in the United States, there is a risk that the path of least resistance becomes continued monetization of fiscal deficits. Eventually (once the slack in goods and labor markets is reduced), this would push inflation expectations—and yield curves—higher.

But there are also several upside risks. The U.S. corporate sector is strong and very profitable, owing to massive labor shedding, creating scope for increased capital spending and hiring to contribute to more robust and above-trend GDP growth in 2011. Similarly, the Eurozone, driven by Germany, could lurch toward greater economic and political union (especially some form of fiscal union), thus containing the problems of its periphery. Meanwhile, growth in Germany and the Eurozone "core" may further accelerate given the strength of emerging markets, which may show even greater resilience, underpinning more rapid global expansion.

The attenuation of downside risks and pleasant surprises in developed and emerging economies could lead to a further increase in demand for risky assets (equities and credit), which would reinforce economic recovery via wealth effects and lower borrowing costs. Positive feedback from consumption to production, employment, and income generation—both within countries and across countries via trade channels—could further accelerate the pace of global growth, particularly if monetary policies in most advanced economies remain looser than expected, supporting asset reflation and thus demand and growth.

Indeed, after four years of either recession or sub-par recovery, the process of balance-sheet repair, while not yet completed, is under way, and may result in less saving and more spending to boost growth in advanced economies. The damage from the financial crisis is still ongoing, but stronger growth can heal many wounds, especially debt-driven wounds.

So far, the downside and upside risks for the world economy are balanced. But if sound government policies in advanced and major emerging economies contain the downside risks that are more prevalent in the first half of this year—which derive from political and policy uncertainty—a more resilient global economic recovery could take hold in the second half of 2011 and into 2012.

This article comes from Project Syndicate.

Like Slate on  Facebook. Follow us on  Twitter.



Don’t Expect Adrian Peterson to Go to Prison

In much of America, beating your children is perfectly legal. 

Ken Burns on Why Teddy Roosevelt Would Never Get Elected in 2014

Cops Briefly Detain Django Unchained Actress Because They Thought She Was a Prostitute

Minimalist Cocktail Posters Make Mixing Drinks a Cinch

How the Apple Watch Will Annoy Us

A glowing screen attached to someone else’s wrist is shinier than all but the blingiest of jewels.


Rainbow Parties and Sex Bracelets

Where teenage sex rumors come from—and why they’re bad for parents and kids.


You Had to Be There

What we can learn from things that used to be funny.

Legendary Critic Greil Marcus Measures and Maps Rock History Through 10 Unlikely Songs

Catfish Creator Nev Schulman’s Book Is Just Like Him: Self-Deluded and Completely Infectious

Sept. 12 2014 5:54 PM An Up-Close Look at the U.S.–Mexico Border
  News & Politics
Sept. 14 2014 2:37 PM When Abuse Is Not Abuse Don’t expect Adrian Peterson to go to prison. In much of America, beating your kids is perfectly legal. 
Sept. 12 2014 5:54 PM Olive Garden Has Been Committing a Culinary Crime Against Humanity
Inside Higher Ed
Sept. 13 2014 8:38 AM “You’re More Than Just a Number” Goucher College goes transcript-free in admissions.
  Double X
The XX Factor
Sept. 12 2014 4:05 PM Life as an NFL Wife: “He's the Star. Keep Him Happy.”
  Slate Plus
Behind the Scenes
Sept. 12 2014 5:55 PM “Do You Know What Porn Is?” Conversations with Dahlia Lithwick’s 11-year-old son.
Brow Beat
Sept. 14 2014 7:10 PM Watch Michael Winslow Perform Every Part of “Whole Lotta Love” With Just His Voice
Future Tense
Sept. 12 2014 3:53 PM We Need to Pass Legislation on Artificial Intelligence Early and Often
  Health & Science
New Scientist
Sept. 14 2014 8:38 AM Scientific Misconduct Should Be a Crime It’s as bad as fraud or theft, only potentially more dangerous.
Sports Nut
Sept. 12 2014 4:36 PM “There’s No Tolerance for That” Pete Carroll and Jim Harbaugh say they don’t abide domestic abuse. So why do the Seahawks and 49ers have a combined six players accused of violence against women?