Developing countries, having recovered pre-crisis growth trends, could now be affected by recession in developed economies
Economic recovery may come to an end in developed economies because private domestic demand remains weak and supportive macroeconomic policies are being replaced by austerity measures as governments try to regain the confidence of the financial markets.
By contrast, developing economies have sustained their strong growth path mainly based on domestic demand. However, they must face financial instability and speculative capital flows generated in developed economies and would not be spared by a new recession in the north.
The Trade and Development Report 2011: Post-crisis policy challenges in the world economy, was released recently by UNCTAD. The report shows that, after a rapid post-crisis recovery, the world economy is slowing down from about four per cent GDP growth in 2010 to around three per cent in 2011.
Growth performance is strong in developing economies, which have resumed their pre-crisis growth trend and are expanding at above six per cent this year. In contrast, developed economies will only grow between 1.5 and two per cent in 2011. Transition economies continue recovering from the steep fall in 2009 with growth rates at around four per cent.
As the initial impulses from the inventory cycle and fiscal stimulus programmes have gradually disappeared since mid-2010, the fundamental weakness of the recovery in developed economies comes to the fore. Private demand alone is not sufficiently strong to maintain the momentum of recovery, as unemployment remains high and wages are stagnating.
Moreover, household indebtedness continues to be high and banks are reluctant to provide new financing. Here, the shift towards fiscal and monetary policy tightening represents a major risk of a prolonged period of mediocre growth in developed economies – if not of an outright contraction.
In the United States of America, recovery has been stalling, as domestic demand has remained subdued due to stagnating wages and employment. With interest rates at historically low levels for the foreseeable future and fiscal stimulus waning, a quick return to a satisfactory growth trajectory is highly unlikely.
In Japan, recovery has been delayed by the impact of unprecedented supply-chain and energy disruptions due to the massive earthquake and tsunami in March. In the European Union, wage earners´ incomes remain very low, as does domestic demand.
With the unresolved euro crisis, the reappearance of severe debt market stress in the second quarter of 2011 and the prospect of fiscal austerity measures spreading across Europe, there is a high risk that the Euro zone will continue to act as a significant drag on global growth. In fact, recent plunges in stock markets largely reflect worsening growth perspectives.
Expansion has remained strong in all developing regions, with the exception of North Africa. Improvements in labour markets and sustained public support have prolonged the recovery of investment and domestic demand.
East, South and South-East Asia continue to record the highest GDP growth rates – more than seven per cent in 2011 – increasingly driven by domestic demand; however, this region is undergoing a moderate slowdown owing to supply-chain effects from Japan, tighter monetary conditions and weak demand in some major export markets.
In Latin America, expansion continues to be robust at almost five per cent, spurred by consumption and investment demand and by gains from the terms of trade; in Central American and Caribbean economies, growth will be more modest, mainly owing to their dependence on exports to the United States.
Sub-Saharan Africa should keep growing at the same rapid pace as in 2010 – almost six per cent – as a result of terms-of-trade gains, investments in infrastructure and expansionary fiscal policies. Recovery of investment and household demand helped maintain the economic upturn in the transition economies, where national disposable income improved owing to better terms of trade in some cases, and to increased worker remittances in others.
Although growth in developing countries has become more and more dependent on the expansion of domestic markets, these countries still face significant external risks because of economic weakness in the developed economies and a lack of significant reforms in international financial markets. As a result, these countries remain vulnerable to trade and financial shocks that would strongly affect the volume of their exports and the prices of primary commodities, as in 2008.
International trade in goods and services rebounded sharply in 2010, after having registered its steepest fall since World War II. In 2011, the volume of international trade is expected to return to a single-digit figure from 14 per cent in 2010, particularly in developed economies. Recovery of trade has been faster in developing than in developed economies, mirroring the two-speed recovery of GDP growth rates.
Commodity prices have been recovering since the second quarter of 2009, surging from mid-2010 to early 2011, and have experienced a reversal since the second quarter of 2011. Price increases have partly followed demand recovery and supply shocks, as well as a boost in financial investment in commodities. More recently, drops in commodity prices have largely reflected negative changes in the sentiment of financial investors.
The implementation of measures to reduce domestic demand in response to high commodity prices has proven to be inappropriate, harming growth without significantly lowering inflation. The recourse to incomes policy in which wages would progress in line with productivity would be a more rational way to control inflationary pressures and to support domestic demand growth at the same time.
After a coordinated and successful international response to the 2008-2009 crisis, international cooperation within the G-20 has made little progress in areas such as financial regulation and global macroeconomic coordination, the report says. After shrinking with the crisis, global imbalances rose again in 2010 and 2011 in absolute terms, although they remain well below their pre-crisis levels in terms of each country´s GDP.
As their GDP growth has largely been driven by an increase in domestic demand, some large surplus developing and emerging economies such as China and Russia are honouring their commitment to help reduce global imbalances; this contrasts with main surplus developed economies – Germany and Japan – where net exports continue to be the major engine for growth.
International cooperation is also required to better control speculative capital movements and to avoid subsequent exchange rate misalignments, macroeconomic instability and financial fragility, especially in the developing economies most affected by those flows. The renewed risks of financial turmoil and economic recession should prompt more effective international cooperation in efforts to achieve global rebalancing and sustained growth.