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Canada's State of Trade: Trade and Investment Update 2011
Global Economic Performance1
Overview and Global Prospects
The global recovery, which gained a foothold toward the middle of 2009, picked up speed at the start of 2010 before decelerating during the second half of last year. This slowdown reflects a normal inventory cycle. As businesses moved to replenish depleted inventories early in the year, economic activity expanded more rapidly.
However, the pace of activity remains geographically uneven, with employment lagging in several countries. Economies that are running behind the global recovery typically suffered large financial shocks during the crisis, often related to housing booms and high external indebtedness, or they are facing financial market pressures. Broadly speaking, the recovery is moving at two speeds, with large output gaps in most advanced economies and closing or closed gaps in emerging and developing economies.
In major advanced economies, economic growth has been modest, especially considering the depth of the recession, reaching just 3.0 percent in 2010 (Table 1-1). In the United States and the euro zone, the economy is following as weak a path as that following the recessions of the early 1990s, despite amuch deeper fall.Meanwhile, those advanced economies in Asia have experienced a strong rebound. Overall, growth is insufficiently strong tomake amajor dent in high unemployment rates, particularly in the advancedWestern economies.
In contrast,many emerging and developing economies have seen robust growth, reaching 7.3 percent in 2010, and have low unemployment rates. In a growing number of these economies, there is evidence of tightening capacity constraints. Among emerging and developing economies, those in Asia are in the lead, followed by those in Latin America and the Caribbean, whereas those in eastern Europe are only just beginning to enjoy significant growth.
In most advanced economies, the handoff from public to private demand is proceeding smoothly, reducing concerns that diminishing fiscal policy support might cause a “double-dip” recession. Financial conditions continue to improve, although they remain somewhat fragile. In many emerging market economies, demand is robust and overheating is a growing policy concern. Rising food and commodity prices pose a threat to poor households, adding to social and economic tensions, notably in the Middle East and North Africa.
World real GDP growth is forecast to be about 4.5 percent in 2011 and 2012, down modestly from 5.0 percent in 2010. Real GDP in advanced economies and emerging and developing economies is expected to expand by some 2.4 percent and 6.5 percent, respectively. Downside risks continue to outweigh upside risks. In advanced economies, weak sovereign balance sheets and still-moribund real estatemarkets continue to presentmajor concerns, especially in certain euro zone economies; financial risks are also a concern as a result of the high funding requirements of banks and sovereigns. New downside risks are building on account of commodity prices, notably for oil, and, concurrently, geopolitical uncertainty, as well as overheating and booming asset markets in emerging market economies.
|1 IMF forecast for 2010.|
|of which France||2.3||0.1||-2.5||1.5||1.6||1.8|
|of which Germany||2.8||0.7||-4.7||3.5||2.5||2.1|
|of which Italy||1.5||-1.3||-5.2||1.3||1.1||1.3|
|of which China||14.2||9.6||9.2||10.3||9.6||9.5|
|of which India||9.9||6.2||6.8||10.4||8.2||7.8|
|of which ASEAN-5||6.4||4.7||1.7||6.9||5.4||5.7|
|of which Russia1||8.5||5.2||-7.8||4.0||4.8||4.5|
|of which Brazil1||6.1||5.2||-0.6||7.5||4.5||4.1|
|of which Mexico||3.2||1.5||-6.1||5.5||4.6||4.0|
Source:IMF World Economic Outlook database, April 2011 and U.S. Bureau of Economic Analysis.
However, there is also the potential for upside surprises to growth in the short term, owing to strong corporate balance sheets in advanced economies and buoyant demand in emerging and developing economies.
Following a burst of strong growth driven by inventory restocking in late 2009 and early 2010, U.S. economic growth slowed but then strengthened again in the second half of 2010. For the year as a whole, real GDP increased 2.9 percent in 2010 after decreasing 2.6 percent in 2009. It was the strongest rate of real expansion in the United States since 2005. The gain primarily reflected upturns in exports, non-residential fixed investment, consumer spending, and inventory investment, and a smaller decrease in residential fixed investment; an increase in imports constituted the main drag on domestic growth.
The 1.7-percent upturn in consumer spending in 2010 added 1.26 percentage points to real GDP growth after subtracting 0.84 percentage point a year earlier and reflected upturns in durables, non-durables, and services. Durables in particular were up strongly—7.7 percent in real terms over 2009 levels—followed by non-durables (2.7 percent) and services (0.5 percent). Personal incomes rose 3.1 percent in nominal terms, while headline inflation was 1.6 percent in 2010.
The rise in non-residential fixed investment added 0.55 percentage point to real GDP growth and reflected a 15.3-percent rise in equipment and software and a smaller decrease (froma 20.4-percent drop in 2009 to a 13.7-percent decline in 2010) in structures.
Residential fixed investment subtracted 0.07 percentage point from real GDP growth in 2010. However, after declining by 24.0 percent in 2008 and 22.9 percent in 2009, the decline in 2010 was a more modest 3.0 percent. Nonetheless, it subtracted from real GDP growth.
The swing in inventory investment added 1.40 percentage points to real GDP growth after subtracting 0.55 percentage point in 2009.
U.S. real exports of goods and services advanced 11.7 percent in 2010 after posting a 9.5-percent retraction in 2009. The improvement in exports added 1.34 percentage points to real GDP growth, reflecting widespread upturns in exports of goods. Exports of services also turned up. However, real imports of goods and services posted a stronger rebound in 2010, up 12.6 percent after registering a 13.8-percent decline the previous year. At the same time, higher imports subtracted 1.83 percentage points from real GDP growth, mostly reflecting widespread upturns in imports of goods. Thus, net exports became a drag on the U.S. economy in 2010, removing 0.49 percentage point from real economic growth.
Government spending slowed, reflecting a larger decrease in state and local government spending and a slowdown in federal government spending.
Recovery in the labour market remains sluggish. After shedding 8.75 million jobs between January 2008 and February 2010, the labour market has added just under 1.5 million jobs since the trough, barely sufficient to keep up with the growth of the working-age population. The employmentpopulation ratio is thus largely unchanged since the start of the recovery.2 About a third of the decline in the unemployment rate since October 2009—to 8.8 percent inMarch 2011—is attributable to a decline in labour force participation, which now stands at its lowest level inmore than a quarter century.3
Moreover, long-term unemployment and broader measures of underemployment— including the share of workers involuntarilyworking part-time or onlymarginally attached to the labour force—remain well above historic highs according to the IMF. The agency argues that the crisis may also have increased structural unemployment in the United States because severe sectoral and regional shocks have created mismatches between labour skill supply and demand.
The U.S. economy is projected to grow by 2.8 percent this year, edging up to 2.9 percent in 2012, with gradually firming private final demand offsetting the waning support fromfederal fiscal policy. Themid-December fiscal package implies slightly more than a half percentage point addition to growth this year, although recent proposals to curb federal spending would reduce the overall impact of the spending. The IMF expects that the drag on 2011 growth from oil price increaseswill largely offset the boost fromthe Federal Reserve’s policies of quantitative easing and from stronger net exports. Unemployment is projected to remain high, declining only moderately to about 7.8 percent in 2012.
Japan’s growth in 2010was the fastest among the major advanced economies, driven by sizable fiscal stimulus and a rebound in exports. After two consecutive years of contraction, the Japanese economy rebounded in 2010, registering a 3.9-percent rate of growth for real GDP. The pick up reflected strong expansion of exports, a boost in inventory investment, and rising government and household consumption that was partly offset by increased imports.
A 24.0-percent increase in real exports led the advances. The gain effectively reversed the 23.9-percent decline in exports in 2009. At the same time, real imports expanded by 9.8 percent after declining by 15.3 percent a year earlier. For the year as a whole, exports contributed 3.0 percentage points to realGDP growth while imports subtracted 1.2 percentage points from growth.
The replenishment of inventories added 0.6 percentage point to real GDP growth after subtracting 1.5 percentage points in 2009 and 0.2 percentage point the year before.
Similarly, Japanese private consumption reversed two years of contraction by expanding 1.8 percent last year. Households led the advance as household consumption grew by 1.9 percent. Overall, growth in private consumption added 1.1 percentage points to GDP growth in 2010.
Weaknesses in the Japanese housing sector persist. The decline in residential fixed investment removed 0.2 percentage point to real GDP growth in 2010, reflecting a 6.3-percent decline in residential investment. Japanese residential fixed investment had fallen by 14.0 percent, 8.0 percent, and 9.6 percent in 2009, 2008, and 2007, respectively.
Non-residential fixed investment expanded by 2.1 percent in 2010, adding 0.3 percentage point to real GDP growth. In comparison, non-residential investment had declined by 16.7 percent in 2009 and by 1.4 percent in 2008.
Finally, government consumption expanded by 2.3 percent last year while public investment was down by 3.2 percent. Overall, public demand added 0.3 percentage point to real GDP growth in 2010.
Looking forward, there are large uncertainties for Japan associated with the Tohoku earthquake. Official estimates of the damage to the capital stock are about 3 to 5 percent of GDP, roughly twice that of the 1995 Kobe earthquake. This, however, does not account for the effects of possible power shortages and ongoing risks associated with the crisis at the Fukushima Daiichi nuclear power plant. Assuming that the power shortages and the nuclear crisis are resolved within a few months, the IMF projects growth in Japan to slow to 1.4 percent in 2011 before recovering to 2.1 percent in 2012.
In Europe, the recovery is proceeding modestly. Overall, real activity in the region remains below its potential level and unemployment remains high,with substantial variation across economies. According to the IMF, concerns about banking sector losses and fiscal sustainability led to widening sovereign spreads in euro zone countries, in some cases reaching highs not seen since the launch of the Economic and Monetary Union.
After posting a 4.1-percent decline in real GDP in 2009, growth in euro zone real output was up 1.8 percent last year. Gains weremodest acrossmost sub-components of GDP with the exception of trade, which posted vigorous rates of expansion.
Real exports were up 11.6 percent in 2010 while real imports advanced 10.7 percent as net exports contributed 0.8 percentage point to overall GDP growth.
The remaining 1.0 percent of growth came from domestic demand. Private consumption and inventory replenishment both contributed 0.5 percentage point to real growth, as real consumption was up 0.8 percent. Government consumption was also up, advancing 0.7 percent to contribute a further 0.2 percentage point to growth; however, a 0.8-percent decline in euro zone gross fixed capital formation (GFCF) removed 0.2 percentage point from growth. For GFCF, it was the third consecutive annual decline.
The euro zone is not without its problems and the outlook is for a continued gradual and uneven expansion. In 2011, the largest economies in the region (e.g., France, Germany and Spain) will implement measures to reduce their deficits, while other countries that have come undermarket pressure (e.g., Greece, Ireland and Portugal) will continue with sizable front-loaded consolidation. Additionally, financial systems in Europe remain vulnerable and several key issues need to be addressed. In particular, questions about asset quality remain largely unresolved while some euro zone banks face significant capital shortfalls.
Euro zone real GDP is projected to grow at 1.6 percent in 2011 and 1.8 percent in 2012. However, prospects across the region are divergent, largely reflecting differences in the state of public and private sector balance sheets and the stance of macroeconomic policies.
In particular, growth in Germany is expected to moderate from 3.5 percent last year to 2.5 percent this year and 2.1 percent next year, mainly due to the withdrawal of fiscal support and the slowdown in external demand growth. In France, growth is projected to fall in line with the euro zone average, rising to 1.6 percent this year and 1.8 percent in 2012, as consumption growth is subdued by the retrenchment of fiscal stimulus and export growth is weakened by slowing external demand. In Italy, the recovery is expected to remain weak, as longstanding competitiveness problems constrain export growth and the planned fiscal consolidation weighs on private demand. Growth in Italy is forecast to fall below the euro zone average over the next few years, at 1.1 percent for 2011 and 1.3 percent for the following year. The austerity measures taken in response to the sovereign debt crisis will particularly impact those economies most closely associated with the crisis: Greece is projected to contract by 3.0 percent in 2011; Portugal is also projected to post a decline of 1.5 percent this year; and Ireland and Spain are expected to postmodest gains of 0.5 percent and 0.8 percent, respectively.
After registering the largest contraction on record in 2009, at 4.9 percent, the U.K. economy responded by posting growth of 1.3 percent last year. Economic expansion was registered for four consecutive quarters starting with the fourth quarter of 2009. However, the recovery is sputtering as the United Kingdomclosed out 2010 with a 0.5-percent decline in economic activity in the fourth quarter of 2010.
As with its euro zone neighbours, gains were most vigorous in trade. Real exports of goods and services advanced 5.3 percent in 2010 after retracting 10.1 percent in 2009. Goods led the increase, up 10.7 percent, while U.K. services exports slipped 2.3 percent. Overall, exports added 1.4 percentage points to economic growth in 2010.
For imports, the rebound was somewhat larger than that observed for exports. Real imports climbed 8.5 percent last year after posting an 11.9-percent decline the year before. Again, goods led the way, up 11.2 percent, while services imports nudged ahead 1.1 percent. The increase in imports, which are a subtraction fromGDP, removed 2.4 percentage points from real growth last year.
On the domestic front, household final consumption rose by 0.8 percent during 2010 in contrast to a 3.3-percent decline the previous year. Expenditures on durables led the way, up 2.9 percent, followed by nondurables (1.3 percent), and services (0.5 percent), while semi-durables experienced a reduction of 0.4 percent. The upturn in consumer spending added 0.5 percentage point to real GDP growth.
General government spending also advanced by 0.8 percent in 2010, contributing 0.2 percentage point to growth for the year.
Gross fixed capital formation increased by 3.0 percent in 2010, after having fallen by 15.4 percent in 2009. This expansion added 0.5 percentage point to real output growth in 2010. Inventories
Inventories also posted a small net addition in 2010 of nearly £2.6 billion in constant 2006 sterling pounds in contrast to a £16.0 billion drawdown a year earlier.
In the United Kingdom, growth is projected at 1.7 percent in 2011 as front-loaded fiscal consolidation dampens domestic demand. However, the rate of expansion is expected to pick up to 2.3 percent in 2012.
Decomposition of Per-Capita GDP Growth
Economists often use a nation’s per-capita real GDP as an indicator of the standard of living of its citizens. Using a method called growth accounting, per-capita real GDP growth can be decomposed into three key components, which are analyzed to determine their individual effects: labour productivity; labour force participation rate; and the employment rate. The relationship between these components is described by the following equation:
% Change in GDP Per Capita = % Change in Labour Productivity + % Change in Labour Force Participation Rate + % Change in Employment Rate
Labour productivity indicates how much each worker employed within an economy produces; the labour force participation rate indicates the proportion of the population that is available for the production of goods and services; and the employment rate indicates the proportion of the available population that actually works in the economy.
Total Per Capita GDP Growth Accounting Decomposition, 1991-2010**
Data: Global Insight.
Source: Office of the Chief Economist, DFAIT.
* Middle East Comprises Israel, Iran and Saudi Arabia.
** Developing Asia-Pacific 1996-2010, Middle East 1999-2010, EU-27 1993-2010.
This methodology has been applied to ten economies (see chart) that together represent the vast majority of the global economy. The results show how each of the three components described above affected growth in per-capita real GDP from1991 to 2010 within each economy.
In each of the ten cases, labour productivity was the largest—and sometimes the only—driver of per-capita GDP growth. In both India and China, increasing labour productivity was the most important driver. In India, changes in the labour force participation rate also exerted a positive yet relatively minor effect on per-capita GDP growth. In China, a falling employment rate exerted a small negative effect on per-capita GDP growth.
In Japan, an aging population exerted a downward effect on (i.e. lowered) the labour force participation rate, leaving labour productivity as the sole driver of per-capita GDP growth. The opposite is in play in theMiddle East and Latin America and the Caribbean, where a young populace continues to enter the labour market in force, thus positively affecting labour force growth in that region, in addition to productivity growth. But even here, productivity growth was predominant in Latin America and the Caribbean as well as in the entire Developing Asia-Pacific region.
Between 1991 and 2010, both Canada and the U.S. saw similar growth in real GDP per capita; in Canada, real GDP per capita grew by 34.6 percent to reach US$35,318 in 2010, whereas in the U.S., real GDP per capita experienced an increase of 35.0 percent, reaching US$42,623. However, in Canada growth in labour productivity was only 23.5 percent over this period, but combined with growth in both the labour force participation rate and the employment rate helped drive the growth in per-capita GDP. By contrast, labour productivity grew 40.0 percent in the United States, but this effect was partially offset by declines in the labour force participation rate and the employment rate.
The lesson to draw from this is that expanding employment or the labour force can be important for improving standards of living. But, many countries with ageing populations are increasingly becoming aware that themost sustainable and effective means by which to achieve continued and long-lasting growth in standards of living is productivity, as evidenced by the massive productivity gains driving growth in China, India and developing Asia-Pacific.
Growth in emerging Asia outpaced all other regions in 2010, led by China and India at 10.3 percent and 10.4 percent, respectively. Growth was supported by strong export performance, buoyant private domestic demand, and, in some cases, rapid credit growth. For the region as a whole, emerging Asia grew by 9.5 percent.
However, signs of overheating are starting tomaterialize in a number of economies. Continued high growth hasmeant that some economies in the region are nowoperating at or above potential. Output gaps in much of the region have closed or are quickly closing. Inflation is also on the rise. Most of the increase in headline inflation in recent months has been due to energy prices along with a spike in food prices, but core inflation has also been increasing in a number of economies,most notably India. Furthermore, real estate prices have been rising at doubledigit rates in a number of economies. At the same time, credit growth is accelerating in some economies (e.g., India and Indonesia), and it remains high in China.
Against this backdrop, growth in emerging Asia is expected tomoderate somewhat, although it will continue to expand rapidly this year and next, at a projected 8.4 percent for both years. Export growth is expected to moderate from last year’s very rapid pace but will remain robust as gains in market share and increased intraregional trade partially offset the weakness in final demand from advanced economies. Capital flows to Asia are likely to continue, driven by both cyclical and structural factors. Autonomous private consumption growth should remain strong, supported by still-rich asset valuations and improved labour market conditions.
China’s growth is expected to lead the region, remaining at a robust 9.6 percent this year and 9.5 percent next year. The drivers of growth are expected to shift increasingly frompublic to private demand as stimulus is withdrawn. Consumption will be bolstered by rapid credit growth, supportive labour market conditions, and other policy efforts to raise household disposable income. For India, growth is expected to moderate but remain above trend, with GDP growth projected at 8.2 percent in 2011 and 7.8 percent in 2012. Infrastructure will remain a key contributor to growth, and corporate investment is expected to accelerate as capacity constraints start to bind and funding conditions remain supportive. The ASEAN-5 economies4 are projected to expand by 5.4 percent in 2011 and 5.7 percent in 2012. The ASEAN-5 will be led by Vietnam, where strong consumption and a recovery in investment will raise growth to 6.3 percent this year and 6.8 percent in 2012.
For the region as a whole, emerging Europe posted solid growth of 4.2 percent in 2010. However, performance within the region was mixed, with Turkey leading the growth at 8.2 percent, while Croatia, Romania and Latvia all contracted last year.
The outlook is for a continued, gradual and uneven expansion. Emerging Europe’s growth is expected to be 3.7 percent in 2011 and 4.0 percent in 2012. Economic prospects across the region seem to be converging toward the regional average. For leading Turkey, growth is expected to moderate to 4.6 percent this year and 4.5 percent next year. In Poland, growth is expected to remain solid at about 3.8 percent this year and 3.6 percent next year as corporate profitability rises, the absorption of EU funds continues, and bank lending resumes. After contracting in 2010, Croatia is projected to record moderate growth of 1.3 percent this year, rising to 1.8 percent next year while Romania is expected to rebound to 1.5 percent this year and to 4.4 percent in 2012. Most of the other emerging European economies are expected to grow in the 2.8 to 3.3 percent range for 2011, with the exception of Lithuania, which is projected to grow by 4.6 percent.
Latin America and the Caribbean (LAC)
Strong demand from the emerging Asian economies has boosted world commodity prices, to the benefit of Latin America and the Caribbean. More recently, with the rebound in global economic activity, exports to other destinations have also bounced back. This has encouraged strong capital inflows and moderate current account deficits. Despite the support to current accounts from commodity prices, however, deficits are widening and are projected to continue widening on the back of robust domestic demand. Additionally, the generally buoyant conditions are associated with rising inflation in South and Central America. On the other hand,Mexico is not facing overheating pressure at this time.
Against this background, real output expanded by 6.1 percent last year, and is projected to average 4.7 percent in 2011 and 4.2 percent in 2012. As with any large region, however, experiences vary.
For South American economies, the outlook is generally positive, albeit less robust than in 2010. Because of Brazil’s systemic importance to the region, many neighbouring countries are currently benefiting from its strong growth. However, projections are for output growth in Brazil to slip to 4.5 percent this year from7.5 percent last year.With that decline, growth in South America is expected to moderate from 6.5 percent in 2010 to 4.8 percent in 2011. Paraguay, the leading growth performer of all main LAC economies, at 15.3 percent in 2010, will see its expected growth drop to a more sustainable 5.6 percent this year. Similarly, growth prospects for Argentina will fall to a more sustainable 6.0 percent from last year’s 9.2 percent. On the other hand, Chile is expected to accelerate to 5.9 percent this year, up from5.3 percent in 2010. Venezuela, which contracted by 1.9 percent in 2010, is expected to return to growth this year, with a 1.8-percent rate of expansion.
For Mexico, prospects continue to be closely aligned with those for the United States. In line with the improved outlook for the U.S. economy, real activity in 2011 is projected to expand by 4.6 percent.
In Central America, and Panama in particular, the recovery is strengthening on the back of external demand, and output gaps are almost closed. Support has also come from a recovery in remittance flows. These trends are expected to continue and the outlook for the region is for 4.0-percent growth this year and 4.3-percent growth next year, up from 3.6-percent growth in 2010.
The outlook for the Caribbean countries has improved in line with the global recovery. Growth in 2011 is now forecast to be 4.2 percent, rising to 4.5 percent in 2012. Much of this, however, reflects the strong performance of the Dominican Republic and post-earthquake rebuilding in Haiti.
Commonwealth of Independent States (CIS) Economies
Recovery in the CIS region is proceeding at a steady pace, following the region’s economic collapse during the crisis. Several factors are supporting the recovery. Higher commodity prices are boosting production and employment in the region’s commodity-exporting economies. Also, the rebound in real activity in Russia is benefiting other CIS economies through trade, remittances and investment. In addition, a gradual normalization of trade and capital flows to the region continues.
Real activity in the CIS region grew by 4.6 percent in 2010 and is projected to expand by 5.0 percent in 2011 and 4.7 percent in 2012. However, within the region, growth prospects differ substantially.
Notwithstanding the large fiscal stimulus implemented during the crisis (at about 9 percent of GDP), Russia posted only a 4.0- percent rate of increase in 2010. Growth is projected to pick up to 4.8 percent in 2011 and 4.5 percent in 2012. Private sector demand is likely to remain subdued as nonperforming loans in the banking systemconstrain credit and consumption growth. Among other energy exporters, Turkmenistan is expected to benefit from high gas prices and be among the top performers in the region, growing by 9.0 percent in 2011. In Uzbekistan, growth is also projected to remain high, at 7.0 percent in 2011, supported by strong domestic demand, public investment and commodity exports (including gold and cotton).
For energy importers as a group, growth is projected at 5.3 percent in 2011 and 4.9 percent in 2012 as some of these economies (e.g., Armenia and Moldova) benefit fromthe rebound in remittances fromRussia and others from the return of financial stability (such as Ukraine). As in previous years, for most CIS economies, growth prospects remain highly dependent on the speed of recovery in Russia.
TheMiddle East region weathered the global crisis relatively well, posting a 3.8-percent rate of economic growth in 2010. However, spreading social unrest, rising sovereign risk premiums and elevated commodity import prices will constrain growth prospects in several Middle Eastern economies.
Higher commodity prices and external demand helped boost production and exports inmany economies in the region. In addition, government spending programs continue to foster recovery in many oilexporting economies. At the same time, political discontent, high unemployment and rising food prices are causing social unrest in a number of countries, which is likely to dampen their short-term growth.
Real GDP in the Middle East region is projected to grow at 4.1 percent in 2011, edging up to 4.2 percent in 2012. But prospects for economic growth vary widely across the region.
The group of oil exporters have the better outlook.Growth for this group is expected to pick up to 4.9 percent this year. The strongest performer isQatar,where real activity is projected to expand by 20.0 percent in 2011, underpinned by continued expansion in natural gas production and large investment expenditures. In Saudi Arabia, GDP is expected to grow at about 7.5 percent this year, supported by sizable government infrastructure investment. However, for Iran, growth in 2011 is expected to stall temporarily as subsidies for energy and other products are phased out—a much-needed reform that will yield benefits in the medium term. Disruption of oil production in Libya means that, given constraints on non-OPEC capacity, oil production fromotherOPEC suppliers is likely to increase in 2011.
The economic outlook is less positive for oil importers. The political turmoil in Egypt will likely curtail output and dampen tourism receipts. GDP growth is thus expected to slow to 1.0 percent, down significantly from the 5.1 percent registered in 2010. In Tunisia, growth is projected to slow to 1.3 percent in 2011, down from 3.7 percent in 2010, as expected declines in tourism and foreign direct investment harm other sectors of the economy.
Africa managed to avoid a contraction during the global recession of 2009 and grew rapidly last year. The region trailed only emerging Asia and Latin America and the Caribbean in growth in 2010 and is second only to developing Asia in the outlook for growth in 2011. Output gaps inmany of the region’s economies are starting to close, although South Africa is a notable exception.
The region grew rapidly last year, advancing 5.0 percent in real terms. Domestic demand growth remained robust, trade and commodity prices rebounded, and macroeconomic policies continued to be accommodative. Terms-of-trade gains are supporting the region’s external balances, and the gradual reorientation of exports toward faster-growing regions such as Asia has been sustained.
Looking forward, real activity in sub- Saharan Africa is projected to expand by 5.5 percent this year and 5.9 percent next year, but disparities will remain.
Growth in the region is projected to be led by the region’s oil exporters. The expected strengthening of oil prices in 2011 will help sustain the recovery for this group. As a whole, the African oil exporters are projected to grow by 6.9 percent this year and by 7.0 percent in 2012, led by Angola. Following the sharp rebound in oil production last year in Nigeria, oil output is expected to stabilize this year, and the economy is set to expand by 6.9 percent. Most oil exporting economies are planning to use the buoyancy of global oil markets as an opportunity to return to fiscal surpluses and rebuild reserves.
At the same time, growth in Africa’s low income countries (LICs) is projected to expand by 5.9 percent this year. Ghana, the third-largest LIC in the region, is projected to grow by 13.7 percent this year as oil production commences in the Jubilee oilfield and growth in the non-oil sector remains robust. The recovery in other LICs, such as Kenya and Ethiopia, is also expected to stay strong this year, supported by infrastructure investment and improving agricultural production. However, political turmoil in Cote d’Ivoire has dampened growth prospects, and that economy is projected to contract by 7.5 percent in 2011.
In marked contrast to the robust growth in most of the region, recovery is expected to be relatively weak in South Africa, the region’s largest economy. Despite an already sizable output gap, South Africa is expected to grow by only 3.5 percent in 2011—a rate that is insufficient to reverse the substantial job losses of the past two years. The outlook primarily reflects the lack of strong domestic demand, as private investment is held back by excess capacity.
Assumptions and Risks
As indicated earlier, all projections in this chapter stemfromthe IMF’s April 2011 World Economic Outlook. In making its projections, the IMF has adopted a number of technical assumptions that underpin its estimations. Key among these assumptions are that (1) for the advanced economies, real effective exchange rates remain constant at their average levels during the period between February 8-March 8, 2011; (2) established policies (fiscal andmonetary) of national authorities are maintained; and (3) the price of oil will average US$107.16 a barrel in 2011 and US$108.00 a barrel in 2012. 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 the IMFmodellers are based on officially announced budgets, adjusted for differences between the national authorities and the IMF regarding macroeconomic assumptions and projected fiscal outcomes, withmedium-termprojections 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.
One of the key assumptions of the forecast relates to oil prices being in the US$107- US$108 per barrel range. There is a risk to growth relating to the potential for oil prices to surprise further on the upside because of supply disruptions. The IMF has examined the case of a temporary disruption pushing prices to US$150 per barrel and found that it would lower real GDP in the advanced economies, in Asia and in Africa by threequarters of a percentage point, and lower output in Latin America and the Caribbean by one-half of a percentage point. For the CIS and the Middle East, higher prices would yield output gains.
In addition, the outlook for activity a year ago was unusually uncertain because of downside risks stemming from fiscal fragilities. Over the course of the past year, financial risks declined as the recovery gained foothold. Improvements in macroeconomic performance and strong prospects for emerging market assets have supported overall financial stability. Accommodative macroeconomic conditions have helped ease balance sheet risks and have spurred an increase in risk appetite. However, significant fiscal and financial vulnerabilities still exist.
The key downside risks stemfromhigh leverage and limited improvements in credit quality in advanced economies and building credit risks in some major emerging market economies. In particular, weak sovereign balance sheets in several advanced economies raise the potential for high volatility in interest rates and risk premiums. Additionally, bank exposure to real estate continues to pose downside risks. Real estate markets are moribund in a number of advanced economies and the number of homes at risk of foreclosure remains significant. In the meantime, new risks are appearing because of booming real estate markets in emerging market economies. Finally, the risk of overheating in some emergingmarket economies cannot be ignored. Growth in these economies could surprise on the upside in the short term because of relatively loose macroeconomic policies, but medium-term risks are to the downside. These risks represent higher interest rates, weaker future income growth and the potential for a large drop in commodity prices.
1 Statistics, estimations, and projections in this chapter come from the International Monetary Fund’s World Economic Outlook, April 2011, 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 2011 database.
2 IMF World Economic Outlook, April 2011, Chapter 2.
3 IMF World Economic Outlook, April 2011, Chapter 2.
4 The Association of Southeast Asian Nations (ASEAN) comprises Indonesia, Malaysia, Philippines, Thailand and Vietnam.
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