The Global Economy

The V-shaped economic recovery in key industrialized economies, and especially emerging markets, came to an end in autumn 2010 as the impact of special factors tapered off and growth normalized. Furthermore, several countries, particularly those on the periphery of the eurozone, have implemented restrictive fiscal policies and many other countries will follow suit in the course of 2011. The same can be said of monetary policy. A number of countries have already implemented a monetary policy turnaround, such as Australia, Norway, China and many other emerging market economies. The European Central Bank will probably start to exit its extremely lax monetary policy around the middle of the year, and the U.S. Federal Reserve may follow towards the end of the year. Global economic growth is therefore likely to slow to around 4.25 % in 2011. However, this would still be distinctly above the average growth rate of the past three decades. There has been a noticeable decline in the risks to U.S. growth recently, not least thanks to improved economic indicators. The U.S. economy could grow by 3.75 % this year. For the Asian emerging markets, we are expecting more balanced and sustainable growth of around 8 %, following 9.5 % in 2010.

The exceptional situation facing monetary and fiscal policymakers in the wake of the crisis may entail risks for the global economy. While a smooth exit from the highly expansive policies would be desirable to counter the risk of inflation, this poses a huge challenge given the major uncertainty about economic fundamentals, the stability of individual areas of the financial system, and market reactions to specific exit measures. Sovereign risk may remain an issue in 2011 if some countries fail to convince the financial markets that they will be able to stabilize their fiscal position in the long term. A worsening of the debt crisis in some eurozone countries could also lead to a destabilization of the banking systems, which would pose major difficulties for a change in monetary policy direction. In China and other emerging market economies, there is a risk not only of price bubbles in the real estate sector but also of a general acceleration in inflation. All of these factors may result in turmoil in the financial markets, which would in turn dampen the pace of the global economic recovery.

Persistent underutilized production capacity in the industrialized countries should contain inflationary pressures, which are stemming primarily from rising energy and food prices. In the U.S, we expect the inflation rate to accelerate to a good 2 % this year. The eurozone inflation is likely to accelerate from 1.6 % to 2.25 %, also driven by some steep tax increases in the peripheral states.

Economic growth in the eurozone is expected to slow to almost 1.5 % in 2011, with the uneven trend continuing. The Greek and Portuguese economies are likely to contract during the course of this year in view of drastic consolidation measures, and the Spanish and Irish economies will more or less stagnate. Among the larger eurozone countries, Germany should again have the highest growth rate of 2.5 %, continuing to expand beyond potential. German private consumption should expand by almost 1.5 % after almost stagnating in recent years. Unemployment in Germany is expected to decline further. In 2011, the average number of people unemployed could fall below the 3 million mark, with the unemployment rate close to 7 %, compared with 7.7 % in 2010. Strong economic activity and the effects of the austerity package should ensure that the general government deficit in Germany is brought below the 3 % Maastricht limit in 2011.

In Germany, we are expecting inflation of 2 % in 2011, compared with 1.1 % in 2010. Rising food prices pose an inflation risk for some emerging market countries, in particular, as the proportion of food in their basket of goods is higher than in industrialized countries.

In 2012 we expect global growth to pick up again by about 0.25 percentage points to 4.5 % with all major regions showing some gain. Among the industrial countries the biggest improvement should be seen in Japan, whereas the German economy will decelerate towards its potential growth rate. Within emerging markets growth rates should remain more or less unchanged in Asia and Latin America compared to 2011, but should increase slightly in the EMEA countries.

Inflation rates in the emerging markets as well as in the industrialized economies are expected to decline a little in 2012, after this year’s energy and food driven spike in 2011. Industrial economies will – with the exception of Japan – continue to tighten monetary and fiscal policy. In the emerging markets the stance of monetary policy should not change that much overall, given more active policy in 2010 and 2011.

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