The global economic recovery continued to remain fragile with renewed challenges in 2011. The advanced economies, which showed a slower-than-expected recovery at the beginning of the year were hit by another wave of shocks due to fiscal and financial uncertainty towards the latter part of the year. Global financial conditions deteriorated, particularly with intensified strains in the Euro area, reflecting the downgrade of sovereign ratings in many countries by international rating agencies and further escalating downside risks to global economic activity. Consequently, the world economy, which was growing at 5.2 per cent in 2010, is estimated to have expanded only by 3.8 per cent in 2011.
Compared to economic growth in 2010, almost all major economic regions have experienced a lower growth in 2011. However, as seen in the past several years, a noticeable feature of global economic activity is its uneven nature, where advanced economies are estimated to have expanded by 1.6 per cent while emerging and developing economies are estimated to have grown by 6.2 per cent in 2011. Economies in developing Asia marked a decline in their average growth to 7.9 per cent in 2011 compared to the strong recovery at 9.5 per cent in 2010.
The continued divergence in economic performance among advanced economies and emerging economies warrant significant ‘rebalancing’ in order to deliver strong and sustainable growth.
The rebalancing needs to take place both ‘internally’ and ‘externally’. Internally, a shift from fiscal stimulus to private demand needs to take place in many advanced economies. Externally, the current account deficit economies need to increase demand for their exports while current account surplus economies (notably emerging market economies) should focus more on increasing domestic demand.
However, the required rebalancing in emerging market economies seems to be slower than expected, as per the projected current account balances. Particularly, as IMF’s Regional Economic Outlook (April 2011) highlights, the rebalancing of growth towards private domestic demand in the Asia Pacific region needs to be accompanied by measures to address structural constraints on domestic demand, such as investing more on infrastructure development and strengthening social safety nets. Nonetheless, the emerging market economies will continue to drive global growth over the medium term, albeit the pace of their economic growth would slow down and adjust to long run equilibrium levels. In particular, according to the latest World Economic Outlook (WEO) estimates by the IMF, the growth in emerging and developing economies slowed down, more than the forecast in 2011, possibly due to the effects of macroeconomic policy tightening. Oil prices remained high in the international market in 2011, although other commodity prices showed a deceleration towards the latter part of the year. The rising trend in commodity prices that started in the second half of 2010 extended into 2011. Accordingly, consumer prices in advanced economies, and emerging market and developing economies increased to 2.7 per cent and 7.2 per cent, respectively, in 2011, from 1.6 per cent and 6.1 per cent, respectively, in 2010. International oil prices, which remained at elevated levels in 2011 mainly due to supply side constraints, are expected to further increase during 2012 despite slower than expected global recovery. Price increases in food and energy remain the main concern over the near term, particularly in the context of geopolitical factors in oil exporting countries. Nonetheless, the IMF’s forecasts show some signs of moderation of consumer price pressure in 2012 due to a weaker economic outlook where advanced economies and emerging market and developing economies are expected to record average inflation rates of 1.6 per cent and 6.2 per cent, respectively.
Short term interest rates continued to remain low in many advanced economies in 2011 while some emerging market economies raised policy rates amidst rising inflationary pressures, mainly due to rapid growth in credit and asset prices. Advanced economies took further measures to ease monetary conditions given the slow and fragile economic recovery and low business confidence. However, some emerging market economies such as China, India and Malaysia continued to curb inflationary pressures through policy tightening. The currency markets experienced significant volatility during 2011. The appreciating trend observed in 2010 in many major currencies against the US dollar was reversed during 2011, with a few exceptions. The Pound sterling and euro, which appreciated substantially during 2010, fell in value in 2011 amidst the sovereign debt crisis and fears of contagion in the Euro area. Thus, Pound sterling and euro depreciated by 0.73 per cent and 2.29 per cent, respectively, ending at 1.54 US dollars and 1.29 US dollars, respectively, as at end 2011. Meanwhile, Japanese yen continued to rise against the US dollar in 2011 (by 5 per cent), albeit at a moderate pace relative to 2010, possibly due to aggressive measures to restructure the country’s finances and stimulate the economy, including the quantitative easing and issuance of sovereign bonds. Further, China’s renminbi also gained value against the US dollar in 2011, by about 5 per cent, in the backdrop of increasing policy interest rates, which moved up three times during 2011 to curb the pace of rising commodity prices and prevent overheating of the economy. Also, China’s central bank increased the statutory reserve requirement in order to tighten credit and excess money in the economy. The renminbi ended at 0.16 of a US dollar (i.e., 6.31 renminbi per US dollar) at the year end. Meanwhile, some regional currencies depreciated substantially against the US dollar during 2011. In particular Indian rupee and Bangladesh taka, depreciated by about 15 per cent and 14 per cent, respectively.
Private capital flows displayed greater volatility owing to uneven global recovery and worsening of the European debt crisis, causing a liquidity freeze in the European interbank market. Meanwhile, official flows such as official development assistance (ODA) have been affected by stringent austerity measures and sovereign debt problems in advanced economies. The persistence of a lower interest rate regime in many advanced economies may have diverted capital flows to emerging market and developing economies. Under these circumstances, capital flows in excess of the absorptive capacity of emerging market and developing economies, or with speculative motive, could lead to exchange rate misalignment, credit booms and asset price bubbles, thus, posing significant challenges to macroeconomic stability. Such concerns have led emerging market and developing economies to build ‘self insurance’ stocks of international reserves, by US dollars 1.1 trillion during 2011, totaling over US dollars 7 trillion as of year end.
However, a larger amount of these international reserves were invested in low yielding treasuries in advanced economies (mainly in US Treasury securities) due to their perceived ‘safe haven’ status for global investors, thus, contributing to increasing global imbalances.
The global economic outlook for 2012 is uncertain. The risks and related concerns to global economic recovery persist and this unpredictable global economic expansion is expected to continue well into 2012. In the United States, growth prospects appear to be improving, underpinned by fiscal policy stimulus, accommodative monetary conditions, and gradual strengthening of investment and private consumption. Meanwhile, the adverse effects of the earthquake and tsunami in Japan in March 2011 caused less supply chain disruptions than previously expected, thus, easing pressure on the global recovery.
The latest projections by IMF indicate that the Euro area would experience a mild recession in 2012, amidst growing concerns over financial sector stability and fiscal sustainability. The growth prospects for emerging market and developing economies during 2012 are expected to moderate due to a likely deterioration in the external environment and possible threats to domestic demand due to continuation of macroeconomic policy tightening. Nonetheless, growth in emerging market and developing economies is expected to remain relatively robust during 2012 as they would be able to counter weaker foreign demand through appropriate policy measures. Also, high credit and asset price growth remains a major concern in a number of emerging and developing economies while any disruption to the global oil supply due to geopolitical factors could dampen activity throughout the world.