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International Economic UpdateJune 20, 2008Global Inflation IncreasesThe current international situation is best characterized as slow economic growth and higher inflation among the advanced economies and steady growth with higher inflation among the emerging market economies. Rapid growth in the emerging market economies has been a major cause of upward pressure on global commodity prices over the past year. These emerging markets include most notably China and India, but also Brazil, Russia, Malaysia, Thailand and other Southeast Asian economies. Inflationary pressure is likely to persist as growth forecasts for these countries remain high. In addition, energy prices are distorted among these emerging markets due to a widespread use of price controls and government subsidies. While this has kept energy prices low and consumption high, the increased strain on government finances will likely cause many to abandon or reduce these programs (Taiwan, Malaysia and Indonesia have already announced plans to cut fuel subsidies).
Increased commodity prices are causing higher inflation among the advanced economies as they continue to cope with the effects of slower growth (Chart 1). This has raised concerns that the global economy may be in a period of stagflation. It has also created a conundrum for central banks weighing the dangers of lower growth and higher inflation. The Ifo World Economic Climate Indicator has steadily declined since third quarter 2007(Chart 2). In this survey, economic experts in multinational firms are asked about their current situation and their expectations over the next six months. The pessimism expressed in the survey bodes poorly for global economic growth.
Growth in European countries is being hampered by many of the same factors affecting the U.S. economy. According to the Institute for International Finance, European banks have incurred $200 billion of the total $397 billion in credit losses incurred globally since 2007. The U.K. is experiencing a housing downturn, with prices declining for seven consecutive months, according to Nationwide Building Society. Finally, despite a strong euro, Europeans are paying high prices for gasoline, fueling protests among British truck drivers and French fisherman. Despite poor economic growth in the developed economies, economic growth among the emerging market economies remains robust. China and India grew at annualized real rates of 10.6 and 8.8 percent, respectively, in first quarter 2008. The high price of food, however, is taking an even greater toll on inflation in these economies, as it makes up a greater percentage of their consumption basket. Higher food prices are being driven, in part, by higher oil prices as processing, transportation and distribution costs rose. Also contributing is the use of food commodities in biofuels (one-third of the 11.72 billion bushels of U.S. corn produced is used in ethanol production). Weather-related disruptions in major grain-producing regions such as Australia have also played a large role. These price increases have caused civil strife in many developing countries. The United Nations' Food and Agriculture Organization (FAO) Food Price Index shows that while food prices have risen 51 percent in the past 12 months, they have begun to stabilize in recent months as the northern hemisphere produces record harvests and countries begin to ease export restrictions (Chart 3). Long-range forecasts from the UN FAO project real food prices declining but remaining above levels seen in the past decade.
One bright spot from the international economy continues to be the growth in U.S. real exports (Chart 4). Despite the slowed growth among major U.S. trade partners and higher shipping costs associated with high oil prices, growth in real exports has remained strong. The result is that real net exports have contributed on average 1.1 percentage points to GDP growth over the last four quarters and are expected to contribute 1 percentage point in the second quarter of 2008.
Overall, inflation has become the biggest concern in the international economy. High oil and food prices across developed and developing countries have caused central bankers to focus more on inflation. The European Central Bank, who has kept interest rates constant for the past 12 months, has given indications it may raise rates at its next meeting. After a series of rate cuts the Bank of England and the Bank of Canada both kept interest rates steady at their last meeting. In emerging markets as well, China, India and Brazil have all tightened monetary policy in the past few weeks. —Patrick Roy About the AuthorRoy is an economic research assistant in the Research Department at the Federal Reserve Bank of Dallas. |
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