Friday, November 20, 2009

Global Growth Looking Up

In the latest set of economic forecasts issued by the OECD earlier in the week, the picture of the global economic recovery seems a little more upbeat compared to the prevailing view as recently as a few months ago. Not only do the OECD projections for the major economies are more optimistic than those issued by the IMF at the beginning of October, but they suggest- despite the appropriate cautionary notes attached to them- that a global recovery is indeed taking hold and likely to consolidate further over the 2010-2011 period.,3343,en_2649_33733_20347538_1_1_1_1,00.html

The OECD forecasts GDP growth of 2.5% in the U.S. next year, versus 1.5% growth predicted by the IMF in its early October projections, which, in turn, represented an upgrade compared to its own previous forecast of only 0.8% issued last July. In regards to the euro area, the OECD now expects growth of 0.9% in 2010 versus 0.3% in the IMF numbers- which, again, represents a 0.6% upward revision from its own previous forecast in July. As for Japan, both the OECD and the IMF's latest report see growth in the 1.7%-1.8% range for 2010. Finally, the OECD projections, perhaps more importantly, show a further pick up in growth for the U.S. and euro zone in 2011 to 2.8% and 1.7% respectively, which would essentially represent a return to growth rates close to the long-term trend for both economies.

Granted- forecasts are just that, forecasts, and they are a famously unreliable exercise, as experience has shown numerous times over the years. In fact, the OECD itself is quick to acknowledge substantial both downside and upside risks to those projections, which it deems to be roughly balanced. It furthermore, warns that the global recovery will still be relatively timid and unlikely to prevent a further rise in the unemployment rate in the main member-countries in the first half of 2010, before the rate stabilizes.

Still, it is hard to ignore the reality that in the spate of the last several months, there is an unmistakable upgrade in the degree of confidence around the world that a sustainable economic recovery is taking hold. As a result, predictions of a double-dip recession that were much "in vogue" earlier in the summer (particularly in the context of the U.S.) are now melting away quickly.

The reasons for the newly-found sense of credibility in the unfolding global economic recovery are multi-faceted but, essentially, interconnected.

China's impressive turnaround (expected to return solidly to double-digit growth rates in 2010) is pulling the rest of Asia- including Japan- higher. The resulting vigorous comeback of the Pacific Rim region acts as a potent "locomotive" for the rest of the world economy and shows that the U.S. economy is no longer the only one that can play that role on the global stage.

Another major factor underlying the emergence of somewhat more upbeat expectations in the last few months has to do with the increasingly accepted premise that the banking systems in the U.S. and euro area have survived the financial crisis of the last two years; still deeply wounded- appreciably more so in the U.S. than in the euro zone- but, ultimately, survived. The diminution of fears of a downward spiral of the banking sector that would leave those economies seriously limping on a protracted basis are now diminishing.

This is not to say that the fragile shape their banking sector remains in will not represent a key headwind preventing a more robust economic recovery ahead, both here and in the euro area. But this is likely to find a partial offset in the anticipated quick turnaround in global trade already underway, set into motion by a number of other major economies elsewhere in the world that are coming back on line, as their banking systems escaped the financial crisis practically unscathed (China, Brazil, Japan, India come to mind).

Perhaps this serves as a stark reminder that the center of gravity of the world economy is slowly slipping away from the U.S.-Europe axis in the last decade or so and this can have significant implications for the way global business cycles play out in the future. Emerging markets are no longer the passive recipients of a "ripple effect" originating in the traditional major economic powers, but they are now becoming a major counter-balancing force and an engine of stability in the context of global business cycles.

Anthony Karydakis