GLOBAL ECONOMIC MONITOR April 2013

 

Five years after the eruption of the global financial crisis in 2008, recovery of the global economy remains fragile. In the third quarter of 2012, the US registered high growth and in the euro area pace of economic contraction moderated. Nevertheless, prospects for advanced economies’ growth in 2013 remain subdued. The US GDP estimates for the fourth quarter of 2012 indicate a tentative upturn on the back of improvement in housing and payroll employment. However, the country’s macroeconomic prospects are clouded by the uncertainty surrounding the temporary appropriations and the debt ceiling. The euro area, plagued by contingent risks of political uncertainty and adjustment fatigue, saw a contraction in its GDP for the third successive quarter in the last quarter of 2012. Japan too witnessed a contraction in its output in fourth quarter along with a worsening trade deficit raising the question of effectiveness of the emerging package of stimulus measures and how quickly they will turn around the economy. Growth in emerging market and developing economies (EDEs) bottomed down as well, but an enduring recovery is expected based on global headwinds. While some EDEs, including China , are gradually returning to faster growth, activity is slowing in others, hobbled by weak external demand and slack domestic investment.

Global unemployment is expected to remain on a higher trajectory this fiscal. In some advanced economies and emerging markets, demand for lower-skilled workers has fallen, particularly in manufacturing, leading to rising inequality within countries. Low female labor force participation in some countries represents another significant missed opportunity to strengthen economic development and growth. Adding to the complexity of these challenges, the global recession has produced high unemployment and further exacerbated income disparities. According to International Labour Organisation (ILO), the number of unemployed worldwide is expected to rise by 5.1 million in 2013, to more than 202 million in 2013 and by another 3 million in 2014. In 2012 a quarter of the increase of 4 million in global unemployment was seen in the advanced economies, while three quarters was in other regions, particularly in East Asia, South Asia and Sub-Saharan Africa.

During the fourth quarter, international fuel prices remained high, though non-fuel commodity prices softened modestly, despite the slowdown in global growth, signaling persistent inflationary pressures, particularly for net energy importers. Inflation in advanced economies is likely to remain subdued as demand remains weak, leaving the global inflation scenario benign in the near term. Improved supply prospects in key commodities such as oil and food are also likely to restrain commodity price pressures. However, upside risks persist, especially on the back of some recovery in EDEs and large quantitative easing by advanced economies central banks. In the presence of significant excess global liquidity, triggers for supply disruptions or incremental news flow on reduced slack could exacerbate price volatility and become a source of inflationary pressure.

Higher threat of protectionism since the start of global economic crisis caused the World Trade Organization (WTO) to issue a warning that as long as global economic weakness persists, protectionist pressure will build and could eventually become overwhelming. WTO figures show that world trade growth fell to 2% in 2012, and is expected to remain sluggish in 2013 at around 3.3% as the economic slowdown in Europe continues to suppress global import demand. To prevent a self-destructive lapse into economic nationalism, countries need to refocus their attention on reinforcing the multilateral trading system. In 2012, the dollar value of world merchandise exports only increased by 0.2% to US$18.3 trillion and value of world commercial services exports rose just 2% in 2012 to US$4.3 trillion. UNCTAD data reveals that during the period 1995-2011, world commodity exports increased fivefold to reach US$6.055 trillion. The share of developing countries in world commodity exports also grew by 11% during this period reaching 51% by 2011. Commodity export value rose too as fuel exports increased to 52% of all commodity exports in 2011.

International financial market stress moderated greatly following aggressive monetary easing measures by the central banks of advanced economies, and recent policy initiatives on fiscal consolidation in the euro area economies, thereby encouraging capital flows into EDEs. However, in the absence of credible long-term fiscal consolidation in the US, and generally reduced fiscal space in advanced economies, the efficacy of monetary policy actions may get subdued due to resulting destabilising capital flows around the world. Easing measures by advanced economies may lower the value of their respective currencies, making their exports relatively cheaper and at the same time put pressure on the currencies of emerging countries. This will raise the risk of currency war as emerging markets are negatively impacted by volatile capital flows and currency fluctuations caused by policies of advanced economies.