Saturday, February 20, 2010

Policy Driven , Multispread Recovery

The global recovery is off to a stronger start than anticipated earlier but is proceeding at differentspeeds in the various regions.

Following the deepest global downturn inrecent history, economic growth solidified and broadened to advanced economies in the second half of 2009. In 2010, world output is expected to rise by 4 percent. This represents an upward revision of ¾ percentage point from the October 2009 World Economic Outlook. In most advanced economies, the recovery is expected to remain sluggish by past standards, whereas in many emerging and developing economies, activity is expected to be relatively vigorous, largely driven by buoyant internal demand. Policies need to foster a rebalancing of global demand, remaining supportive where recoveries are not yet well sustained.

Real activity is rebounding, supported by extraordinary policy stimulus

Global production and trade bounced back in the second half of 2009 (Figure 2). Confidence rebounded strongly on both the financial and real fronts, as extraordinary policy support forestalled another Great Depression.

Recovery is proceeding at varying speeds

Output in the advanced economies is now expected to expand by 2 percent in 2010,

following a sharp decline in output in 2009. The new forecast reflects an upward revision of 3/4 percentage point. In 2011, growth is projected to edge up further to 2½ percent. In

spite of the revision, the recovery in advanced economies is still expected to be weak by

historical standards, with real output remaining below its pre-crisis level until late 2011.

Commodity prices are rebounding

Commodity prices rose strongly during the early stages of the recovery, despite generally high inventories. To a large extent, this was due to the buoyant recovery in emerging Asia, to the onset of recovery in other emerging and developing economies more generally, and to the improvement in global financial conditions.

Inflation pressures will remain subdued in most economies

The still-low levels of capacity utilization and well-anchored inflation expectations are

expected to contain inflation pressures (Figure 3). In the advanced economies, headline

inflation is expected to pick up from zero in 2009 to 1¼ percent in 2010, as rebounding

energy prices more than offset slowing labor costs. In emerging and developing economies, inflation is expected to edge up to 6¼ percent in 2010, as some of these economies may face growing upward pressures due to more limited economic slack and increased capital flows.

There are important risks in both directions

There are still significant risks to the outlook.

On the upside, the reversal of the confidence crisis and the reduction in uncertainty may continue to foster a stronger-than-expected improvement in financial market sentiment and prompt a larger-than-expected rebound in capital flows, trade, and private demand. New policy initiatives in the United States to reduce unemployment could provide a further impetus to both U.S. and global growth.

On the downside, a key risk is that a premature and incoherent exit from supportive policies may undermine global growth and its rebalancing. Another important risk is that impaired financial systems and housing markets or rising unemployment in key advanced economies may hold back the recovery in household spending more than expected. In addition, rising concerns about worsening budgetary positions and fiscal sustainability could unsettle financial markets and stifle the recovery by raising the cost of borrowing for households and companies. Yet another downside risk is that rallying commodity prices may constrain the recovery in advanced economies.

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