Research Dept. News
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Monthly Report, num 346 - May 2011
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Executive summary
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Favourable outlook for the world economy, with provisos
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The IMF predicts 4.4% growth for the world economy in 2011.
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Keeping its springtime appointment, the International Monetary Fund (IMF) published its conclusions regarding the situation of the world economy. Few variations on January's forecasts and fewer risks of a double-dip recession. Growth in 2011 stands at a healthy 4.4%, slightly lower than the 5.0% of 2010. Emerging economies continue to be strong, with 6.2% growth forecast for 2011, while advanced economies are consolidating their recovery, which is still modest, with 2.4% growth forecast for 2011. Rising oil prices are the greatest risk to growth in the advanced economies, as well as representing an inflationary risk for the emerging economies.
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According to the IMF, the slight improvement in financial conditions is helping world demand to pick up which, in 2011, is supported more by private consumption and less by inventory rebuilding, as happened in the first half of 2010. The labour market and real estate crisis are the greatest obstacles to growth in advanced economies. Delay in US fiscal consolidation and the sovereign debt problems of Europe's peripheral countries represent another additional risk. In the case of the emerging economies, rising food prices are a source of political instability, particularly in the Middle East and North Africa.
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Rising commodity prices, the problems of sovereign debt and slow job creation are just some areas of concern.
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The Fund states that the recovery is gradually consolidating in advanced economies. The United States' growth prospects remain a little below 3% in 2011 and 2012. Whereas private consumption and business sentiment are the positive face of economic activity, the housing and labour market are the negative. Employment is recovering slowly and the housing sector is still extremely weak. The growth prospects for 2011 are relatively solid but we must not forget that they are still being supported by expansionary measures, both fiscal and monetary, adopted at the onset of the crisis. The fiscal deficit is once again around 10% of gross domestic product (GDP) in 2011 and politicians can't agree as to how to tackle fiscal adjustment. The agency Standard & Poor's revised the outlook on the long-term debt rating to negative, given the lack of definition in fiscal policy in the medium term.
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With regard to US monetary policy, the debate concerns when and how to start its normalization: i.e. to undo the quantitative easing adopted to tackle the risk of depression. The Federal Reserve believes that long-term risks have increased but is still of the opinion that core inflation will remain under control.
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The recovery becomes firmer in the United States.
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Japan grew by 3.9% in 2010 thanks to the recovery of its exports, but it's expected to perform more moderately in 2011 with growth of 1.4%, which might increase to 2.1% in 2012. However, the growth forecast for 2011 could be downgraded if the energy cuts continue as a result of the Fukushima nuclear crisis. The huge human tragedy caused by March's earthquake will entail losses of capital stock equivalent to between 3% and 5% of GDP, according to the IMF.
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China's growth is still healthy, although clear signs of overheating are appearing.
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The outlook for emerging economies is still healthy, particularly East Asia, where China's growth is especially good and which, according to the IMF, will remain strong with 9.6% growth in 2011 and 9.5% in 2012. The most recent data indicate that China grew by a healthy 9.7% year-on-year in the first quarter of 2011, slightly below the 9.8% of the previous quarter, although higher than consensus forecasts. This strength has been accompanied by another upswing in inflation, reaching 5.4% in March, the highest level in almost three years. Within this context, the monetary authority has once again raised the official interest rate by 0.25 basis points to 6.31%, the fourth increase since October.
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The economies of Latin America and Eastern Europe will continue to grow less than the Asian economies but are improving their prospects. In the case of Brazil, the IMF has warned of the risk of the economy overheating. The real was on the attack again in April, breaking through the resistance level of 1.60 reais per dollar. The markets have taken advantage of the Brazilian authorities' shift in priorities, which have temporarily ceased battling to stop the currency from appreciating in order to focus all their efforts on stamping out inflation. Inflation that had already reached the central bank's target range in April, when it stood at 6.5% year-on-year. Given this situation, no-one was surprised when the Monetary Policy Committee decided to raise the Selic rate a further 25 basis points to 12% in the same month.
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The euro area consolidates its recovery.
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Meanwhile, 1.6% growth is expected for the euro area in 2011 and 1.8% in 2012, with the prospect of low growth in its periphery. The IMF points out that the recovery in the euro area is consolidating although growth is still below its potential. It has also warned of the region's financial fragility. Available indicators confirm the good performance by production and domestic demand. However, three factors have appeared that are causing concern regarding the economic outlook. One is inflation, which rose to an annual rate of 2.7% in March; core inflation, which excludes volatile elements such as foods and energy, is lower but is also tending to rise, standing at 1.3%.
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Another cause for concern is the corollary of inflation; i.e. the tightening up of monetary policy. In the euro area, in April the European Central Bank raised its official interest rate to 1.25%, a hike which had been clearly predicted by Jean-Claude Trichet at the beginning of March. The reason given for this hike is the institution's concern for the upswing recorded in the rate of inflation. Lastly, and as a result of the increasing distance between the monetary policies on both sides of the Atlantic, another concern is the appreciation of the euro, making the euro area's goods and services more expensive compared with the rest of the world and harming European exports.
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Portugal asks to be bailed out.
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Nonetheless, the month's most relevant event has been Portugal's decision, on 6 April, to ask for the financial support mechanism to be activated given the overwhelming market pressure on Portuguese sovereign debt. The difficulty of the negotiations is two-fold, as the adjustment plan will require Portugal to carry out strenuous fiscal consolidation but, on the other hand, the elections on 5 June mean that both the government and the opposition must be present in the negotiations to ensure the plan can be viably implemented.
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Investors welcome Spain's adjustment efforts.
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Pressure on Portuguese public debt has been combined with rumours of the restructuring of the Greek debt. This uncertainty affected the spread between Spanish and German debt, which widened again, albeit without reaching the previous levels and moving away, at least partially, from the serious and reasonable doubts hovering over Greece and Portugal. Investors welcome Spain's fiscal efforts and also the advances made in economic governance and financial solidarity in the euro area.
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The IMF forecasts believe that Spain's fiscal deficit will increase its correction in 2011, reaching 6.2% of GDP (9.2% in 2010). This represents an improvement in the imbalance of three percentage points compared with last year, the biggest fall recorded among the main developed economies. This forecast is in line with the Bank of Spain's and is only two tenths of a percentage point more pessimistic than the target the government is committed to. It therefore seems as if there's general consensus regarding the good outcome of the fiscal adjustment measures approved by the economic authorities, mainly via reduced government spending.
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Growth in the first quarter, still fragile.
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One of the biggest risks to achieving the public deficit targets is the economy's growth, as the imbalance will be difficult to redress if activity does not get up to cruising speed. The data available for the first quarter of 2011 show that economic activity is progressing very gradually. Various indicators confirm that, in terms of consumption, the element with the greatest relative weight in the economy, its capacity to recover will still be quite limited in 2011 due to the reduction in households' real income. The weak progress made by household spending, together with the poor trends in fiscal expenditure and investment, suggest that domestic demand's contribution to growth will again be negative in 2011.
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However, the data on the foreign sector are being somewhat better than expected, confirming the significant support it will provide to GDP growth this year. In February 2011, the non-energy trade balance posted a surplus of 125.9 million euros, unheard of since 1986. This improvement is due to the higher year-on-year rise in exports, namely 19.7%, compared with the 12.6% recorded by imports. As a result, the non-energy deficit accumulated since March 2010 fell to 15,033 million euros, 77% below the maximum reached three years ago.
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Prices, higher interest rates and the slow recovery in the labour market, the main risks to growth.
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Although the recovery seems to be on the right track, uncertainty still remains high. Notable threats to this recovery are the following: inflation due to rising oil prices, this being sharper in Spain than in other countries in the region; higher interest rates, which reduce the purchasing power of the household segment most in debt; and the sluggish recovery in the labour market, which has yet to create net employment. We should also note, however, the existence of opportunities, such as the risk premium improving more quickly than expected once Portugal's bail-out has been specified and progress is made in restructuring the Spanish financial system. Without doubt, improved confidence would be the best boost for business investment.
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27 April 2011
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Chronology
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Agenda
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