International Economic Update

Global Recovery Continues, but Rate of Expansion Moderates
August 13, 2010

Global economic indicators point to an ongoing recovery from the financial crisis but suggest that the pace of growth is slowing. Emerging economies continue to post prerecession gross domestic product (GDP) growth rates, while advanced economies continue to expand gradually.

Monthly indicators of economic activity show mixed results for both advanced and emerging economies. Inflation remains mostly subdued in advanced economies and high in emerging ones. Labor market conditions remain weak across the board, with unemployment rates elevated and yet to return to prerecession levels for most countries.

In financial markets, the release of stress tests conducted on European banks allayed fears of an impending sovereign debt pandemic. However, skepticism regarding the severity of these tests illustrates continuing uncertainty over sovereign debt default for overleveraged European economies.

Second-Quarter Growth and Industrial Production

Emerging economies continue to lead the recovery and are expected to maintain the lead through 2011, according to the latest International Monetary Fund (IMF) forecasts.[1] Early second-quarter GDP data show robust growth in China. Real GDP rose 10.3 percent from the second quarter of 2009, although the figure was 1.6 percentage points lower than in the first quarter of this year.

Advanced economies are expected to recover more slowly, with a year-over-year growth rate of 2.4 percent projected for 2011.[2] The U.K. posted better-than-expected real GDP growth of 4.5 percent at an annualized rate in the second quarter, the highest since 2001. Gains were broad based, with the construction and business services sectors contributing the most to expansion (Chart 1).

The euro area's second-quarter real GDP grew 1 percent from the first quarter and 1.7 percent from a year ago. Gains were driven by Germany, which expanded 2.2 percent from the first quarter and offset weak figures from countries with budgetary strains. Greece contracted by 1.5 percent in the second quarter, and real output growth came in at 0.2 percent for both Spain and Portugal.[3]

The most recent data on industrial production show mixed results in both advanced and emerging economies. In June, production edged up in China, slowed in the U.K., Japan, Russia and Brazil and leveled off in the U.S. (Chart 2). Canada and the euro area posted increases in May, while India recorded a decline.

Inflation and Monetary Policy

Inflation in some advanced economies has eased to very low levels, raising the specter of deflation already visible in some countries. In the U.S., euro area and Japan, June's core inflation numbers came in, respectively, at 0.97, 0.91 and –1.52 (Chart 3). Weak domestic demand, excess capacity and high unemployment have collectively dampened price increases. In contrast, Canada is the first of the G-7 economies to tighten policy rates, pointing to improved growth prospects and muted inflationary pressures.[4]

Inflation remains high in emerging economies. In China, prices in May increased 0.3 percentage point from April but ticked down slightly in June. Fiscal stimulus programs implemented at the height of the recession and rebounds in output growth have raised domestic liquidity and revived asset price inflation, keeping price pressures elevated. India's prices have been falling since March, but inflation remains in the double digits. In response to high inflation, the Reserve Bank of India raised its policy rate by 25 basis points in July.

Labor Market Conditions Weak in Advanced Economies

Unemployment rates remain elevated in most advanced economies. The latest unemployment numbers show rates creeping up to 8 percent in Canada and 5.3 percent in Japan, with the euro area holding constant at 10 percent. Germany, on a downward trend since April 2009, came in at 7 percent (Chart 4). The German government's subsidized reduced-hours work scheme, along with continued recovery in the manufacturing sector and positive business-expectations indexes, has kept its unemployment rate well below rates for both the euro area (at 10 percent) and the Organization for Economic Cooperation and Development countries (at 8.5 percent).

European Bank Stress Tests

On July 23, the Committee of European Banking Supervisors released the findings of stress tests conducted on 91 European financial institutions. Results showed soundness in the financial system, with only seven banks deemed unable to survive a negative shock to the economy. However, the tests faced widespread criticism that they were not severe enough. The results conveyed sufficient confidence in the European banking system to temper both sovereign and bank credit default swap spreads following their release. Nevertheless, spreads remain elevated as investors closely watch troubled European economies such as Greece, Hungary, Ireland and Portugal for signs of sovereign debt default (Chart 5).

Recovery in Progress

Despite a slowing pace, global recovery from the Great Recession continues. Emerging economies have returned to prerecession growth rates, although a tapering off is anticipated. Advanced economies are seeing more modest growth. Though expansion prospects remain positive, a worldwide tightening of public budgets combined with a downshift in economic-activity indicators and dissipation of the impact of fiscal stimulus plans suggests that the rate of recovery is likely to moderate moving forward.

—Payton Odom and Janet Koech

  1. Forecasts from the International Monetary Fund (IMF) World Economic Outlook Update, July 2010.
  2. According to the July 2010 World Economic Outlook Update, the 2011 GDP growth rate for advanced economies is projected to be 2.4 percent. Economies classified as advanced include Australia, Austria, Belgium, Canada, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Malta, Netherlands, New Zealand, Norway, Portugal, Singapore, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Taiwan Province of China, the U.K. and the U.S.
  3. Second-quarter GDP numbers for the euro area are flash estimates published by Eurostat, the statistical office of the European Union.
  4. The G-7 refers to the seven largest industrialized nations: Canada, France, Germany, Italy, Japan, the U.K. and the U.S.
About the Authors

Odom is a research assistant and Koech is an assistant economist in the Research Department at the Federal Reserve Bank of Dallas.


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