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Canada's State of Trade: Trade and Investment Update 2010
I. Global Economic Performance
Overview and Global Prospects 1
In terms of global economic performance, the recent past can be divided into two parts. From August 2008 through mid- 2009, the world suffered one of the worst global economic downturns in history. The banking system teetered on the abyss, real output fell, and global trade plunged across most economies. Policy intervention on an unprecedented scale was essential to jumpstart the recovery.Monetary policy has been highly expansionary and supported by unconventional liquidity provision, while fiscal policy provided a major stimulus in response to the deep downturn. Recoveries in real and financial activity are mutually supportive. The downturn bottomed out toward mid-2009, and a turnaround has been underway since that time. Nonetheless, even as the recovery has gained traction and risks to global financial stability have eased, stability has not yet been assured.
While activity remains dependent on highly accommodative macroeconomic policies, the recovery has evolved better than many had expected. However, growth has been recovering at varying speeds–– tepidly in many advanced economies but solidly in most emerging and developing economies.
After recording growth rates in excess of 5 percent in both 2006 and 2007, global real gross domestic product (GDP) slowed to 3.0 percent in 2008 before contracting by 0.6 percent in 2009. It was the first and only contraction in global GDP in the history of this data series, dating back to 1980. The losses were widespread, with only a few minor economies not experiencing a slowdown or a contraction. The recovery also picked up momentum as the year progressed: world real GDP growth reached about 3.2 percent on an annualized basis during the second quarter of 2009 and rose to over 4.5 percent during the second half of the year.
The bulk of the declines were tallied by the advanced economies, which collectively contracted by 3.2 percent last year (Table 1). Japan (down 5.2 percent) and advanced EU nations (U.K. down 4.9 percent and the euro area down 4.1 percent) were hardest hit, while North America (United States down 2.4 percent and Canada down 2.6 percent) fared somewhat better, and all other advanced nations performed the best (down 1.1 percent). Yet, a number of encouraging signs suggest that the advanced economies are squarely on a path to recovery. A nascent turn in the inventory cycle and slowing deterioration (followed more recently by improvements) in U.S. labour markets have contributed to the positive developments, and strong manufacturing orders and a recovering corporate bond market are helping foster investment.
The United States is off to a somewhat later but better start than Europe or Japan. The stronger U.S. recovery reflects a variety of differences between the United States and the euro area and Japan: fiscal stimulus was larger; the nonfinancial corporate sector is less reliant on bank credit, which remains constrained, whereas bond markets have staged a comeback; non-financial corporate balance sheets are stronger and rapid restructuring has boosted productivity; and the Federal Reserve reacted earlier and with larger policy rate cuts to lower levels in real terms. In contrast, the large appreciation of the yen may have weighed on the recovery of Japan’s exports, which fell sharply during the global trade slump, and the re-emergence of deflation has pushed up real borrowing rates and wages. The euro area’s trade links with troubled emerging European and Commonwealth of Independent States (CIS) economies and the euro’s intermittent appreciation have curbed the euro area’s exports. In addition, several euro area economies were hit particularly hard by the financial and real estate crises.
|of which France||2.4%||2.3%||0.3%||-2.2%||1.5%|
|of which Germany||3.2%||2.5%||1.2%||-5.0%||1.2%|
|of which Italy||2.0%||1.5%||-1.3%||-5.0%||0.8%|
Source: IMF World Economic Outlook database, April 2010.
The emerging and developing economies broadly experienced a slowdown in economic activity in 2009, but avoided outright contraction. Together, these economies registered growth of 2.4 percent in 2009, compared to 6.1 percent a year earlier. Nonetheless, a number of developing regions recorded lower output in 2009 than in 2008, including Central and Eastern Europe, the CIS countries, and Central and South America. A number of factors are now in place putting these economies on a path to recovery. In the key emerging and developing economies, final domestic demand was already very strong. In addition, these economies have been helped by the turn in the inventory cycle, and external demand is being lifted by the returning normalization of global trade.
In key emerging Asian economies output already exceeds pre-crisis levels by a wide margin, and output growth, averaging about 10 percent during 2009 (Q2 through Q4), is outpacing estimates of full-capacity (potential) output growth. By the third quarter of 2009, growth began to exceed estimates of potential output in a number of Latin American economies too. However, production levels in this region as a whole have barely reached pre-crisis levels, and there is still economic slack in many countries. Recovery is lagging in a number of economies in emerging Europe and the CIS, although some are beginning to rebound strongly from deep troughs. Middle Eastern economies are benefiting from rising demand for oil and rising oil prices. Experience in sub-Saharan Africa is diverse. Most middle-income economies and oil exporters, which experienced sharp decelerations or contractions in output in 2009, are now recovering, supported by the rebound in global trade and commodity prices. At the same time, inmost low-income economies, output growth, after slowing in 2009, is now again close to trend rates.
Overall, the world looks poised for further recovery at varying speeds, both across and within regions. Global growth is projected at 4.2 percent in 2010 and 4.3 percent in 2011 by the IMF. The advanced economies are now expected to expand by 2.3 percent in 2010, coming on the heels of a 3.2 percent decline in output in 2009, and their growth is expected to edge up to 2.4 percent in 2011. For the emerging and developing economies, growth is expected to reach 6.3 percent in 2010 and 6.5 percent in 2011, following a modest 2.4 percent in 2009.
Real GDP turned down in the United States in 2009, decreasing 2.4 percent after a modest increase of 0.4 percent in 2008. The main contributors to the decline were downturns in non-residential fixed investment, in inventory investment, and in consumer spending, partially offset by an improvement in net exports.
Non-residential fixed investment turned down sharply, falling 17.8 percent in 2009 and removing 2.1 percentage points from real growth in 2009. The downturn reflected deep cuts to expenditures on structures and a larger decrease in spending on equipment and software, down 19.8 percent and 16.6 percent, respectively. Residential fixed investment also declined, but at a slightly slower pace than in 2008 (20.5 percent compared to 22.9 percent a year earlier). Inventory destocking also subtracted 0.7 percentage points from growth in real GDP, after subtracting 0.4 percentage points the year before.
Consumer spending fell in 2009 which reduced growth in real GDP by 0.4 percentage points. Spending for services slowed, while spending for durable goods fell somewhat less than in 2008. The pace of government spending also eased, reflecting a slowdown in federal government spending and a downturn in state and local government spending.
Net exports added 1.1 percentage points to the growth in real GDP. Exports turned down for the first time since 2002, but imports decreasedmore than in 2008. Except for a slight increase in services imports, goods and services trade was down in both directions contributing to the declines.
A stimulus-led recovery is under way in the United States,2 but that recovery is expected to be gradual, particularly when the effects of the stimulus subside. In response to the stimulus and a robust inventory cycle, real GDP grew at a seasonally adjusted annualized rate of 2.2 percent in the third quarter of 2009 and by 5.6 percent in the fourth quarter. But private final demand is still subdued. In the fourth quarter, reduced inventory draw-downs contributed more than half of growth. During the same period, net exports also made a modest positive contribution to growth, as the rebound in global trade and recovery in partner economies boosted exports. However, gross private domestic investment (i.e., residential housing and business investment in plant and equipment) remains well below pre-crisis levels.
The labour market remains unusually weak. Since the start of the crisis,more than 7 million jobs have been lost, and 8.8 million people are involuntarily working parttime. The rate at which jobs are being lost has slowed substantially, but employment growth remains negative, and the unemployment rate had reached 10 percent by the end of 2009, although it decreased marginally during the first quarter of 2010.
Real GDP is projected to grow by 3.1 percent in 2010. The recovery will be tempered by the continued need to rebuild household wealth, the expected slow but necessary process of financial sector repair and deleveraging, and continued weakness in the labour market. Thus, private demand is expected to remain soft. The removal of policy stimulus will subtract from growth, which will moderate to 2.6 percent in 2011. Unemployment is projected to remain high in 2010, at 9.4 percent, before declining to 8.3 percent in 2011 as employment growth picks up. Inflation is expected to remain subdued, at 2.1 percent in 2010 and 1.7 percent in 2011, given continued economic slack.
The Japanese economy contracted for the second consecutive year in 2009. Real GDP was down 5.2 percent, after declining 1.2 percent in 2008. The slowdown reflected sharp contractions in private investment, personal consumption, and trade flows, particularly exports.
For the year as a whole, private nonresidential investment plunged 19.3 percent after six years of consecutive increases. At the same time, private residential investment was 14.2 percent lower than in 2008. All told, private non-residential investment removed 3.1 percentage points from real growth while private residential growth removed another one half of a percentage point. Inventory adjustments removed a further 0.3 percentage points.
For net trade, real exports from Japan fell by 24.0 percent, and were only partially offset by a 17.0 percent decline in real imports. This resulted in a net 1.2 percentage point reduction in growth from trade.
Household consumption also contributed negatively to Japanese growth in 2009, removing 0.6 percentage points from real GDP growth.
Stimulus spending was very much in evidence last year in Japan, as public expenditures were on the rise. Government consumption rose by 1.6 percent, while public investment also increased, up 6.0 percent in real terms and registering the first increase of the decade. These public expenditures together added about 0.5 percentage points to GDP growth.
As the year progressed, Japan’s economy picked up mainly due to improvement in overseas economic conditions and to various policy measures, although there is not yet sufficient momentum to support a selfsustaining recovery in domestic private demand. Exports and production have increasedmainly against a backdrop of high growth in emerging economies. Business sentiment has improved, as has business fixed investment.
Improvements in the corporate sector originating fromexports are expected to spill over to the household sector; nonetheless, domestic demand is likely to remain weak as a result of several factors, including the reemergence of deflation, continued excess capacity, and a weak labourmarket. Continued appreciation of the yen in 2010 could dampen the contribution of net exports to growth, particularly in comparison with the rest of Asia. As a result, the growth rate of the economy is likely to only gradually rise, but will be dependent on planned fiscal policy support and the global upturn. GDP is projected to grow by 2 percent in 2010, supported by fiscal stimulus and rising exports. Amore broad-based recovery is expected for 2011, following a moderate pickup in business investment.
Following the sharpest recession since the Second World War, euro-area GDP bottomed out in the second quarter of 2009 and has recovered modestly since then. Measured from peak to trough, GDP fell by 5.2 percent during the 2008-2009 recession, which was more than twice the decline observed in the next-sharpest recession going back to 1970. The quarterly pick up in GDP in the third quarter of 2009 was among the higher initial growth rates following recession troughs; however, this was followed by a stagnant change in GDP in the fourth quarter of 2009. As a consequence, the pick up since the trough in the second quarter of 2009 has been very modest and euro-area GDP remains far below its prerecession peak.
For the year as a whole, euro-area GDP declined 4.1 percent, following 0.6 percent growth in 2008. Only government consumption made a positive contribution to growth as all other major components to real growth retracted for the year. The declines were led by investment, as gross fixed capital formation fell 10.8 percent in 2009 and subtracted 2.4 percentage points from growth. Investment has been contracting since the second quarter of 2008 on account of weak demand, low business confidence, negative earnings growth, historically low capacity utilization, and tight lending standards. Inventory draw-downs were next in importance, removing 0.8 percentage points fromgrowth for the year. Net exports, the difference between exports and imports, removed 0.7 percentage points from growth, due to the more pronounced fall in real exports (down 12.9 percent) compared with real imports (down 11.5 percent). Finally, consumer expenditures fell 1.1 percent after posting a 0.4 percent increase in 2008: the decline removed 0.6 percentage points fromgrowth. Government consumption accelerated from2008 to 2009, rising by 2.3 percent versus a 2.1 percent rise a year earlier, and contributed 0.4 percentage points to growth.
Within the euro area, experiences and recovery prospects by country varied considerably. The area was amongst the hardest hit during the global crisis and is coming out of recession at a slower pace than other regions.
A substantial macroeconomic stimulus has supported the recovery in core advanced European economies (as reflected in the acceleration of government consumption noted above), although private demand has yet to take a firm hold. However, according to the IMF, large current account and fiscal imbalances threaten the recovery in some smaller European economies, with potentially damaging effects on the rest of the region. In particular, concerns about sovereign solvency and liquidity in Greece (and possible contagion effects on other vulnerable euro-area countries) threaten the normalization in financial market conditions. Separately, unresolved problems in the banking sector, which plays a key role in financial intermediation in Europe, have hampered the return to normality.
Nevertheless, the ongoing recovery in Europe has been supported by several factors. First, the turn in the inventory cycle boosted activity in the euro area during the second half of 2009. Second, the normalization of global trade has contributed significantly to growth in the euro area and in emerging Europe. And finally, forceful policies have also fostered recovery, including supportive macroeconomic and financial sector measures for many European economies and coordinated assistance from multilateral institutions for the hardest-hit economies in the region.
Against this backdrop, advanced Europe’s growth performance is expected to be modest. In particular, euro-area GDP is projected to grow at 1.0 percent in 2010, edging up to 1.5 percent in 2011. Nevertheless, there will be pronounced differences in performance across the region. The recovery is expected to be moderate in Germany and France, where export growth is limited by external demand, investment is held back by excess capacity and credit constraints, and consumption is tempered by higher unemployment. Coming out even more slowly from the recession will be smaller euro area economies, where growth is constrained by large fiscal or current account imbalances (e.g. Greece, Ireland, Portugal and Spain).
The uncertainty around the outlook in Europe has increased, with two downside risks becoming more pronounced. In the near term, themain risk is that, if unchecked, market concerns about sovereign liquidity and solvency in Greece could turn into a fullblown sovereign debt crisis, leading to some contagion.3 The second downside risk lies in the need to adjust fiscal and current account imbalances in peripheral economies. Although resolving these imbalances is expected to dampen growth, delays in taking decisive policy action could lead to a protracted process punctuated with occasional crises.
Economic activity in the U.K. contracted by 4.9 percent in 2009, the largest fall on record, compared with a rise of 0.5 percent in 2008. The contraction in real GDP primarily reflected acceleration in cut-backs to gross fixed capital formation, inventory draw-downs, and reduced consumer expenditures.
For the year 2009, gross fixed capital formation decreased by 14.9 percent erasing 2.6 percentage points from growth. A 20.1 percent decline in private capital formation was partially offset by a 17.2 percent increase in public capital expenditures to account for the decline.
At the same time, the level of inventories fell by £15.2 billion, the largest fall on record, compared with a rise of £0.9 billion in 2008. This inventory draw-down removed 1.2 percentage points from growth in 2009.
Compensation of employees fell by 0.5 percent, the only decline on record, helping contribute to a 3.2 percent decline in household final consumption expenditure during 2009. This reduction in consumer spending removed 2.0 percentage points from growth.
For the year as a whole, government final consumption expenditure rose by 2.2 percent, contributing 0.5 percentage points to growth. A weak external environment contributed to a 10.6 percent decline in exports while imports contracted by even more, at 11.9 percent. As a result, net exports contributed 0.7 percentage points to U.K. growth in 2009.
Following six consecutive quarters of declines dating back to the second quarter of 2008, growth resumed in the fourth quarter of 2009 in the United Kingdom. Recovery there is projected to continue at a moderate pace; with previous depreciation in the pound sterling bolstering net exports even as domestic demand likely remains subdued.More specifically, GDP is expected to grow by 1.3 percent in 2010 and to grow by 2.5 percent the following year. Of course, some of the uncertainties surrounding the euro-area forecast equally apply to the United Kingdom.
The downturn in many Asian economies in late 2008 was steeper thanmany had expected; however, recovery came quickly and was just as sharp. The recovery has also been more balanced in Asia than elsewhere, with output growth in most economies supported by both external and domestic demand. Althoughmacroeconomic stimulus was substantial, private demand also gained traction in many economies. Ample policy roomand strong sectoral balance sheets suggest that, formany economies in the region, the recovery will be relatively robust.
Four factors helped to support Asia’s recovery. First, the rapid normalization of trade following the downturn in late 2008 greatly benefited the export-oriented economies in the region. Second, the bottoming out of the inventory cycle, both domestically and in major trading partners, such as the United States, has boosted industrial production and exports. Third, a resumption of capital inflows into the region—in response to widening growth differentials and a renewed appetite for risk—has created abundant liquidity in many economies. Finally, domestic demand has been resilient, with strong public and private components in many of the region’s economies. This resilience is in part attributable to the fact that stronger balance sheets were in place at the onset of this crisis, in both the private sector and the public sector. Low public debt levels also allowed many Asian economies to implement strong and timely countercyclical policy responses to the crisis—IMF estimates indicate that fiscal stimulus added some 1.7 percentage points to Asia’s growth in 2009. Monetary loosening also eased financial conditions across the region— through aggressive cuts in policy interest rates and, in some economies, measures to increase liquidity.
Against this backdrop, emerging Asia’s GDP is projected to grow by 8.7 percent in both 2010 and 2011. However, significant differences remain within the region.
In both China and India, strong domestic demand will support the recovery. In China, GDP growth exceeded the government’s 8 percent target in 2009 and is expected to be close to 10 percent in both 2010 and 2011.What has been so farmainly a publicly driven growth path, built on infrastructure investment, is expected to turn toward stronger private consumption and investment.
In India, growth is projected to be 8.8 percent in 2010 and 8.4 percent in 2011, supported by rising private demand. Consumption will strengthen as the labourmarket improves, and investment is expected to be boosted by strong profitability, rising business confidence, and favourable financing conditions.
The strength in final domestic demand in India and especially China is expected to have positive spillovers for other Asian economies, particularly exporters of commodities and capital goods. Given their extreme openness and high dependence on external demand, growth in the newly industrialized economies (the NIEs—Hong Kong, the Republic of Korea, Singapore, and Taiwan) is projected to rebound sharply froma near 1 percent decline in 2009 to over 5 percent in 2010. In Korea, economic activity is expected to accelerate to 4.5 percent in 2010 and to 5.0 percent in 2011, up strongly from0.2 percent in 2009. Taiwan is expected to rebound from a 1.9 percent contraction to an expansion of 6.5 percent in 2010, the strongest expected rate of growth among the NIEs. For Singapore, the expected rebound will see that economy move from a 2.0 percent contraction in 2009 to 5.7 percent growth in 2010, while for Hong Kong, the projected reversal is from a 2.7 percent contraction to 5.0 percent growth. This reflects not just strong export growth—with capital exports to China an important element— but also a continued boost from the inventory cycle and a boost in business investment in response to high capacity utilization and strong business confidence. All these factors should help offset the impact of the expected withdrawal of fiscal stimulus in 2010.
The Association of Southeast Asian Nations (ASEAN-5) economies4 are projected to grow by 5.4 percent in 2010 and by 5.6 percent in 2011. Private domestic demand is expected to be themain driver of growth, with net exports playing a lesser role than in the past, reflecting stronger imports relative to historical standards. Among the ASEAN-5, the Indonesian economy has proved to be remarkably resilient, with output growing at 4.5 percent in 2009 compared with 1.7 percent for the ASEAN-5 as a whole, thanks to strong domestic demand and less dependence on trade. Indonesia’s growth is expected to accelerate to 6.0 percent in 2010 and to 6.2 percent in 2011, reflecting a pick-up in private investment.
The fortunes, and woes, of emerging Europe are inextricably linked to those of advanced Europe. Overall, the region suffered a 3.8 percent contraction in output in 2009. External financing constraints forced a sharp decline in output in some emerging European economies, particularly those with large current account deficits and heavy dependence on foreign financing (e.g. the Baltics, Bulgaria, and Romania). The impact on the Baltic states was particularly strong in 2009, with output falling by 14.1 percent in Estonia, by 15.0 percent in Lithuania, and by 18.0 percent in Latvia. Although current account imbalances have adjusted in many emerging European countries, remaining external financing constraints, vulnerable household and corporate balance sheets, and financial sector deleveraging will limit the speed of the recovery in the hardest-hit economies in emerging Europe. Thus, growth prospects vary widely in emerging Europe. Economies that weathered the global crisis relatively well (Poland) and others where domestic confidence has already recovered from the initial external shock (Turkey) are projected to rebound more strongly, helped by the return of capital flows and the normalization of global trade. At the same time, economies that faced the crisis with unsustainable domestic booms that had fuelled excessively large current account deficits (Bulgaria, Latvia, and Lithuania) and those with vulnerable private or public sector balance sheets (Hungary, Romania, and the Baltic states) are expected to recover more slowly, partly as a result of limited room for policy manoeuvres.
Turkey is projected to experience the strongest recovery in 2010, with output expected to rise by 5.2 percent; however, growth is expected to moderate in 2011, falling to 3.4 percent. In Central Europe, the expectations are more mixed. Poland, the only economy to avoid contraction in 2009, is expected to record amoderate recovery in 2010—growing by 2.7 percent and accelerating to 3.2 percent in 2011. On the other hand, Hungary, which contracted by 6.3 percent in 2009, is projected to mildly contract 0.2 percent in 2010 before resuming growth in 2011. With regard to the Baltic states, Lithuania (down 1.6 percent) and Latvia (down 4.0 percent) are expected to post the worst performance amongst the emerging European economies in 2010; however, they are set to resume expansion in 2011.
Latin America and the Caribbean (LAC)
Having weathered the global downturn comparatively well, the LAC region is poised for a strong recovery. The recovery has been shaped by a number of factors. First, accommodative policies are helping underpin domestic demand. Second, good fundamentals (sound financial systems and solid balance sheets) are helping the region recover and re-attract capital flows in an improved global financial environment. Third, higher commodity prices and external demand are supporting growth inmany economies, given their dependence on commodity- related earnings. However, weak external demand for tourism from North America and Europe is impeding growth in a number of economies in the region, especially in the Caribbean, whereas lower remittances are affecting many LAC economies.
Against this backdrop, GDP in the LAC region is projected to grow at 4.0 percent in 2010 and 2011, although prospects vary considerably across the region.
The recovery is projected to be especially strong inmany commodity-exporting, financially integrated economies,5 which account for about two thirds of the LAC region’s GDP. In Brazil, growth in 2010 is expected to rebound to 5.5 percent, led by strong private sector consumption and investment. Despite a devastating earthquake in the country, Chile’s GDP is projected to grow at about 4.7 percent in 2010 and 6.0 percent in 2011, supported by highly accommodative policies, a recovery in commodity prices, and reconstruction efforts. In Mexico, growth is expected to rebound to 4.2 percent in 2010, helped in part by the U.S. recovery. In Peru, the top growth performer of the region, GDP is projected to expand by 6.3 percent in 2010, mostly thanks to favourable internal dynamics and high commodity prices. The rebound is also projected to be relatively strong in Bolivia, Paraguay, and Uruguay—with growth rates of 4.0 percent, 5.3 percent, and 5.7 percent, respectively—whereas the recoverery is expected to be weak in Argentina and Colombia and to be delayed in Venezuela, given ongoing power shortages.
The recovery is also expected to be less strong in many commodity-importing economies in the region that have large tourism sectors (for example, Antigua and Barbuda, the Bahamas, Barbados, and St. Lucia). Weaker prospects for tourism, coupled with limited policy roomto support the recovery, are expected to weigh on near-term growth.
The risks to LAC growth are substantial but broadly in balance. The main downside risks are external to the region. They relate to the fragility of the recovery in advanced economies and a potential weakness in commodity prices. There are also significant upside risks, however. These include even stronger internal dynamics, which could attract higher capital flows.
Commonwealth of Independent States (CIS) Economies
The CIS region is emerging from the recession at a moderate pace, after having suffered a large output collapse during the crisis. Higher commodity prices (oil, gas, and metals) are once again supporting production and employment in commodityexporting economies in the region, and the normalization of global trade and capital flows is helping CIS economies recover. The turnaround in real activity in Russia is also benefiting the rest of the region by boosting external demand for employment, capital, and goods from these economies. However, lingering financial sector vulnerability and heavy dependence on external financing is holding back growth in several economies in the region.
In this context, real activity in the CIS region is projected to expand by 4.0 percent in 2010, before moderating slightly to 3.6 percent in 2011.
Within the region, growth prospects are diverse. In Russia, growth is expected to stage a modest recovery, reaching 4.0 percent in 2010. However, despite relatively high oil prices and substantial government stimulus, underlying private domestic demand is likely to remain subdued, with bad loans in the banking systemexpected to stifle credit and growth in consumption.
Energy exporter Uzbekistan is benefiting from high commodity prices and is expected to remain among the top performers in the region in 2010, growing at 8.0 percent. Higher volumes of gas exports and large-scale investments are expected to raise growth in Turkmenistan, which is projected at 12.0 percent in 2010.More generally, those economies with less externally linked financial sectors are expected to continue to do best. Nevertheless, for most CIS economies, growth prospects remain highly dependent on the speed of recovery in Russia, which could surprise in either direction.
The global downturn reduced growth in theMiddle East region bymore than half, as output in the region expanded by 2.4 percent in 2009, down from 5.1 percent in 2008. Growth in the region is expected to rebound quickly, influenced by three factors. First, higher commodity prices and external demand are boosting production and exports in many economies in the region. Second, government spending programs are playing a key role in fostering the recovery. Third, a sluggish recovery in Europemay put a damper on export growth, workers’ remittances, and tourism revenues in certain parts of the region (e.g. Morocco and Tunisia), although these flows are gradually improving.
Considering these and other factors, GDP in the Middle East is projected to grow at 4.5 percent in 2010, edging up to 4.8 percent in 2011. As in the other regions, recovery prospects vary substantially across Middle Eastern economies.
Among the oil exporters, the strongest performer is Qatar, where real activity is projected to expand by 18.5 percent in 2010, underpinned by continued expansion in natural gas production and large investment expenditures. In Saudi Arabia and Kuwait, GDP is expected to grow at about 3.7 percent and 3.1 percent, respectively, this year supported in both cases by sizable government infrastructure investment. In the United Arab Emirates, growth in 2010 is projected to be subdued, at 1.3 percent, with propertyrelated sectors expected to contract further.
Among the oil importers, Egypt’s GDP is projected to grow 5.0 percent in 2010 and 5.5 percent in 2011, helped by stimulative fiscal and monetary policies. Morocco and Tunisia will continue to grow at rates between 3.2 percent to 4.0 percent in 2010 and between 4.5 percent to 5.0 percent in 2011, assuming exports, tourism, remittances, and foreign direct investment continue to improve.
Notwithstanding relatively weak financial linkages with advanced economies, Africa was not unaffected by the global downturn. Shocks from the global crisis hit the region mainly through the trade channel. Nonetheless, Africa has weathered the global crisis well, and its recovery from the slowdown in 2009 is expected to be stronger than following past global downturns. Although some middle-income and oilexporting economies were hit hard by the collapse in export and commodity markets, the region managed to avoid a contraction in 2009, growing by 2.1 percent last year. Its growth is projected to accelerate to 4.7 percent in 2010 and to 5.9 percent in 2011. This recovery reflects the relatively limited integration of most low-income economies into the global economy and the limited impact on their terms of trade, the rapid normalization in global trade and commodity prices, and the use of countercyclical fiscal policies. Remittances and official aid flows were also less affected than anticipated by the recessions in advanced economies. Banking sectors have so far proved generally resilient, and private capital inflows have resumed into the region’smore integrated economies.
Reflecting their greater openness to trade, the region’s middle-income economies were among the hardest hit. Output in South Africa, the largest of these countries, declined by 1.8 percent in 2009. Although the rebound in world trade is supporting recovery, South Africa’s growth—projected at 2.6 percent in 2010 and 3.6 percent in 2011—will be tempered by high unemployment, tight credit conditions, and the recent strength of the rand.
Declining global demand and the collapse in oil prices also dealt a blow to the region’smajor oil exporters. Fiscal surpluses, some of which had been substantial, were cut markedly, and some economies swung into fiscal deficit. As a result, output growth in these economies slowed by 3.5 percentage points to 3.9 percent in 2009, although strong performance in the non-oil economy allowed Nigeria, the region’s largest oil producer, to avoid a substantial slowdown. The recovery of oil prices and stronger global demand will raise growth for these economies to 6.8 percent in 2010 and to 7.1 percent in 2011.
In the region’s low-income economies, the slowdown in economic activity was more modest, owing to their more limited trade and financial integration. Growth in a number of the more fragile economies even accelerated last year, reflecting mainly stronger policies and reconstruction assistance following periods of civil conflict, economic instability, and previous external shocks. For the low-income economies as a whole, output is projected to grow by 4.7 percent in 2010 and by 6.7 percent in 2011. Ethiopia will lead the gains, with growth expected at 7.0 percent in 2010 and accelerating to 7.7 percent in 2011.
Assumptions and Risks
As indicated earlier, all projections in this chapter stem from the IMF’s April 2010 World Economic Outlook. In making its projections, the IMF has adopted a number of technical assumptions that underpin their estimations. Key among these assumptions are that (1) for the advanced economies, real effective exchange rates remain constant at their average levels over the February 23- March 23, 2010, period; (2) that established policies (fiscal and monetary) of national authorities are maintained; and (3) that the price of oil will average US$80.00 a barrel in 2010 and US$83.00 a barrel in 2011. In addition, there are a number of working hypotheses concerning various deposit rates in the world’s financial sectors. Interested readers should consult the Outlook for further details on these technical assumptions.
For the most part, the assumptions made by themodellers are based on officially announced budgets, adjusted for differences between the national authorities and the IMF regarding macroeconomic assumptions and projected fiscal outturns, withmedium-term projections incorporating policy measures that are judged likely to be implemented. Similarly, assumptions about monetary policy are based on the established policy framework in each country.
The outlook for activity remains unusually uncertain and downside risks stemming from fiscal fragilities have come to the fore. The main concern is that room for policy manoeuvres in many advanced economies has either been largely exhausted or has become much more limited, leaving these fragile recoveries exposed to new shocks. In addition, bank exposure to real estate continues to pose downside risks, mainly in the United States and parts of Europe. Risks related to the growth of public debt in advanced economies have risen sharply, as have those related to sovereign debt.Market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown and contagious sovereign debt crisis6 which, in turn, could be transmitted back to banking systems or across borders. However, a widespread public debt scare across major advanced economies appears unlikely, because together these economies have broad tax and investor bases. In this regard, risk assessments by investors are likely to increasingly differentiate among economies, showing greater sensitivity to deteriorating budgetary outlooks.
However, one risk that has diminished is that the systemic risks originating in the financial sector have fallen as the recovery has become more robust. Banking system health is generally improving alongside the economic recovery, continued deleveraging, and normalizing markets.
1. Statistics, estimations, and projections in this chapter come from the International Monetary Fund’s World Economic Outlook, April 2010, supplemented by statistics from the U.S. Bureau of Economic Analysis, the Japan Cabinet Office, the European Central Bank, the U.K Office for National Statistics, and the World Economic Outlook April 2010 database.
2. According to the IMF, the fiscal stimulus boosted real GDP growth by an estimated 1 percentage point in 2009. (WEO Outlook April 2010, page 44.)
3. See the IMF’s Global Financial Stability Report, April 2010, Chapter 1, for further details.
4. The Association of Southeast Asian Nations (ASEAN) comprises Indonesia, Malaysia, Philippines, Thailand, and Vietnam.
5. Financial integration typically refers to an individual country’s degree of financial integration with the global economy in terms of capital flows (i.e. ability to borrow from the rest of the world, ability to invest in foreign assets, and the ability to receive foreign direct investment).
6. See the IMF’s April 2010 Global Financial Stability Report for a further explanation.
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