Slow and Fragile Recovery in the Industrial Countries

INTERNATIONAL ECONOMIC OUTLOOK I. GLOBAL ASSESSMENT AND OUTLOOK The global economy has taken off from the worldwide recession and entered a V-shaped economic recovery. It is expected that in the summer of 2010, the worldwide economic expansion will become very slow and fragile. Massive expansionary fiscal policies - mainly spending stimuli, tax cuts, and direct cash payments - combined with low interest rates have succeeded to end a steep slide in demand. However, large deficits and excessive quantitative easing have not yet generated a self-sustaining recovery as consumers around the globe consolidate their balance sheets from falling asset prices as evidenced by slowly improving consumer confidence. Following six consecutive quarters of negative or nil economic growth, preliminary data on the third quarter of 2009 shows that the combined output of the member countries of the Organization for Economic Cooperation and Development (OECD) - the 30 richest economies in the world - increased by an annual growth rate of 3.2 percent from the previous quarter. In the third quarter of 2009, real output advanced by 2.8 percent in both the United States and the 27-country European Union. At the country level, however, real output rose in Germany, France, and Italy but declined in the United Kingdom. The Japanese economy expanded by 4.8 percent in the third quarter of 2009, after five consecutive declines when real GDP experienced its largest plunge in more than 50 years. Economic activity indicators from the emerging economies in Asia, an important driver of the global economy, also showed signs of strong recovery, particularly from the fast growing populous countries of China and India. In the third quarter of 2009, real GDP expanded by 7.7 percent in China and 7.9 percent in India, in comparison with the same quarter a year ago. Looking at high-frequency indicators, e-forecasting's global leading economic index suggests that the worldwide recession has ended at the end of 2009. The forward-looking indicator - a composite index of 43 countrywide leading indicators that tracks economic conditions seven to nine months in advance - rose in September for the seventh month in a row, following 10 consecutive monthly declines. More important, the indicator's six-month annual growth rate - designed to provide early signals of changing directions in global economic activity between expansions and contractions - posted four positive and accelerating growth rates, following a string of 15 consecutive monthly declines. Our central forecast projects global output to decline by 1 . 1 percent in 2009, led by contractions in the industrial countries of North America, Europe, and Asia Pacific regions. Strong growth in emerging Asia - which includes China and India - will mitigate the worldwide recession with the positive contribution of the region to global output. On the inflation front, both cost-push and demand-pull factors will generate an inflationary environment over the forecast horizon. On the cost side, we expect a slowdown in productivity growth because of the following factors: * An end in cost savings from employment cuts; * Higher growth in overall labor costs from higher salaries in the government sector and additional taxes on all wages; * Steadily growing energy costs from higher oil prices and expensive transitions to alternative energy sources; * Higher non-oil commodity prices; and * Structural inflation from uniform wage increases among sectors despite productivity differentials. On the demand side, we expect the excessive printing of money of the last two years to begin chasing the nonexcessive number of goods produced. We see an acceleration in inflation due to this excess supply of money in addition to strengthening of global demand from the ongoing economic recovery. Global inflation is forecast to average 3.7 percent in 2010 from 2. …