The global market economies are beginning to experience some marked improvement from the economic crisis experienced in recent years. The 2009-2010 economic growth is expected to be a percentage higher against the earlier projection in the first quarter of the year, an estimate of 2.5% in 2010 (IMF 1). In financial terms, the condition has improved tremendously in recent months and is expected to improve more considering the increased interventions through stimulus packages. The recent economic data indicate that the economic activity decline is moderating, albeit with regional variances. Despite all these improvements, the growth projection is portraying slow progress. This paper briefly discusses the economic outlook for the developed and emerging market economies of the world, focusing on the present projections on the status of stabilization and recovery, inflation rate, and risk prospects.
The present State
The current and the projected economic outlook of the world are presenting some relatively prosperous situations in the recent and coming months. According to OECD Economic Outlook Report, the overall improvement in the financial conditions is attributed to the cost of money market fall, corporate bond spread narrowing, equity market rebound as well as moderation in the tightening of bank lending standards (OECD 2). The developed nations like the United States and the United Kingdom have realized an indicator of stability in terms of process and turnover (3). Likewise, the current inventory adjustment status shows signs of progress since the start of 2009, and observers see this to be a positive trend towards growth and recovery, supported by the marked increase in global trade which is also seen to increase the scope of recovery (Elekdag & Tytell 14).
In the emerging nations, it was apparent that the global financial meltdown did not have a direct impact on their economies and thus the economic activity recovery began to show momentum as early as the first quarter of the year (IMF 3). For instance, an estimate of China’s Gross Domestic Product has shown a 7.9% increase in the second quarter of the year, progress attributed to the significant support from the fiscal stimulus together with the spontaneous rise in bank lending (Elekdag & Tytell 17). Other emerging market economies, particularly in Asia have also experienced a strong financial rebound, partly as a result of the stimulus package policy (18).
The Economic Projections
Stabilization and recovery
The developed nations are experiencing improved stability, largely due to the support from the macroeconomic and financial policy (OECD 4). This improvement is behind the idea of the current projections that indicate that the progress is likely to increase, albeit slowly. OECD (5) states that the falls in the cost of money market funding, narrowing corporate bond spreads, equity market rebounds, and bank lending standards moderation will continue to spur the stability as well as recovery. However, a counter impact from the declining bank lending rates as well as the overall concern on the health of the banking sector remains the biggest impediment to the otherwise uneven stabilization and sluggish recovery processes (OECD 6; IMF 2). Contrary to the fourth quarter of 2008 and the first quarter of 2009 that saw the unprecedented contracting economy globally, the present high-frequency data indicate a relatively modest global growth, with real GDP growth projected at 2.9% in 2010 (IMF 1). Inconsistent with this prospective global growth is the developed market economies that show a relatively unsustainable growth until the third quarter of 2010, in line with the April WEO forecast (IMF 3). However, the overall global economic activity is still expected to contract by 1.4% by the end of 2009 and experience a significant expansion of 2.5% in 2010, reflecting a higher point against the April 2009 projections (OCD 3). This projection is said to be just a reflection of a “carryover from the markup in growth during the final half of 2009” (IMF1). Thus contrary to April 2009 WEO forecast, on a fourth-quarter- over-fourth-quarter basis analysis, the July 2009 forecast indicates a probable growth of 2.9% in 2010 (IMF 4). The advanced economies like the US and the emerging economies are said to have suffered asset price collapse during the past declines, and the projection now shows that this deficit will be compensated in the coming years by an increased demand somewhere else (6).
Pressure from Inflation
The overall situation that has seen the persistently weak economy has in essence reduced the stress from inflation. According to IMF’s September 2009 report, the overall inflation was reduced to 1.7% from the previous year’s 6% (IMF 5). The developed nations have their headline and core inflations run at 0% (or below) and 1.5% respectively, a similar trend with the emerging market economies with both headline and core inflations moderated to below 4.5% and 1% respectively (5). However, there has been no express uniformity across the board in the inflation fall, with emerging economies led by china experiencing the biggest inflation fall than anywhere else (5).
Global inflation is projected to remain under pressure despite the increased commodity prices recovery (OECD 16). The projected situation is likely to see inflation sustained at a range between 1 to 2% in most economies, considering the strong demand and the commodity prices projections in 2010 (5). This is likely to increase the unemployment rate to a two-figure digit in some developed market economies, subsequently creating unprecedented challenges to the policymakers since wages and household expenditure will be reduced (5). In some of the major emerging economies, the forces against inflation have led to suggestions that there will be some modest markdowns for inflation and an upward trend to output growth (Elekdag & Tytell 21). The projected headline inflation will slow down from 2008’s 3½% to a record ¼% in the year ending 2009 and show some slight rise to ¾% in 2010 (WEO 4). This inconsistency is likely to be perpetuated by the fact that some of the developed economies will experience extremely low (up to a negative) consumer price increase (4). The emerging market economies, on the other hand, are likely to experience a reducing trend on inflation, with projections standing at 5¾ for the year-end of 2009 to 5% in 2010, from the 2008’s 9½ % (WEO 4).
There is still a downward trend to risk that is expected to proceed to 2010, even though tail risks have visibly diminished (IMF 11). In the developed nations, the rising unemployment coupled with diminishing confidence about the stability of the financial sectors is likely to lead to a renewed pressure on the already low asset prices, thus triggering a deflationary scenario (12). The other concern is possible unsustainable public debt, particularly in the developed market economies that are likely to negatively impact the housing markets. Also, potential risks in the coming years are the fall in housing price that is likely to negate the level of confidence in the bank capital base (Bank for International Settlement 5). The emerging economies are not left out either in this risk surge as they continue to be vulnerable to the increased financial stress.
As a result of this positive news on the economic situation supported by the emerging high-frequency indicators, the recovery is likely to be experienced, albeit at a non-uniform and slower rate (IMF 4). However, many analysts are still skeptical about the overall projected growth citing the rate of recovery’s dependency on balance between opposing and supportive forces (Elekdag & Tytell 24). They observe that despite declining downward drug from financial shock, increased global trade, reduced uncertainty, and the boosted confidence, experts highlight weak supportive forces such as weak housing market and the impaired financial markets (24-25).
Bank for International Settlement. The Role of Valuation and Leverage in Procyclicality: Report Prepared by a Joint Working Group of the Financial Stability Forum and the Committee on the Global Financial System, 2009.
Elekdag, Daninger & Tytell, Balakrishnan. The Transmission of Financial Stress. 2009. Web.
International Monetary Fund (IMF). World Economic Outlook (WEO) Update: Contractionary Forces Receding but Weak Recovery Ahead, September 2009. Print.
OECD. What is the economic Outlook for OECD Countries? An Interim Assessment, 2009. Web.
World Economic Outlook (WEO). Global Economic Slump Challenges Policies, 2009. Print.