Canada's State of Trade: Trade and Investment Update 2012
I. Global Economic Performance1
Overview and Global Prospects
In 2011, three years after the onset of the Great Recession—the first truly global one—sustained recovery of lost ground still proved elusive. Growth had returned in 2009, with the inventory restocking in early 2010 adding additional momentum. But the adverse events of the past few years consistently delayed and dampened the progress of the economic recovery in both the developed and developing worlds. Some of these events were unpredictable natural disasters, others stemmed from pre-recession patterns of activity that could not be sustained presently, but some were caused by the same forces that brought on the recession and have yet to be properly addressed. The Great Recession of 2008-2009, although technically over, continues to manifest itself in high unemployment, an uncertain business investment climate, fragile consumer confidence and further fiscal retrenchment.
After a strong cyclical rebound in global industrial production and trade in 2010, economic activity was already expected to moderate in 2011. However, as government stimulus expired across the developed world and political conditions for further stimulus did not materialize, private demand did not pick up the slack as expected. Throughout 2011, issues related to eurozone sovereign debts have repeatedly proved resistant to half-measures. The political gridlock in the United States manifested in the debt ceiling crisis worried investors to the point that the United States’ triple-A credit rating was downgraded. Meanwhile, civil disorder in many North African countries increased global uncertainty, and the civil war in Libya disrupted oil prices. Finally, the natural disasters in Japan, and their aftermath, disrupted the global value chain networks in Southeast Asia and, to some degree, across the world. The main impact of these events was concentrated in the second and fourth quarters, with the global growth consequently moving in a see-saw pattern throughout the year. The brunt of the Japanese disasters and the Libyan civil war hit the second quarter output hard, while the prospects for the eurozone were the darkest toward the end of the year, reducing economic growth in the fourth quarter. Thailand suffered devastating floods in that final quarter as well.
The world’s real GDP growth moderated from 5.3 percent in 2010 to 3.9 percent in 2011, and further moderation to 3.5 percent is expected in 2012. This rebound was stronger than the rebounds following many previous recessions; the same is true for the patterns of consumption and investment. On the negative side, the recovering economies exhibited much higher levels of unemployment than usual, and part of the recovery was enabled by a substantial worldwide macroeconomic stimulus. But the strong GDP growth hides the story of a very uneven recovery for the developed and the developing worlds.
Growth in major advanced economies slowed from 3.2 percent in 2010 to 1.6 percent in 2011. The slowdown was caused in large part by developments in the eurozone. Growing fiscal stress and increasing uncertainty over the future of the European Monetary Union caused output in the eurozone to contract in the fourth quarter. However, deeper reasons are at the heart of the weak recovery both in the EU and across the developed world.
It is well-documented that recoveries are weaker and more prolonged in the aftermath of financial crises. The process of deleveraging in both financial and household sectors lengthens the recovery period, and the climate of stagnant credit and housing markets adds to the problem. Until that process is complete, the growth of domestic consumption and investment will continue to be slow, and unemployment will remain persistently high in the developed countries. The protracted downturn in European growth associated with trimming fiscal deficits slowed recovery while the climate of fiscal austerity that prevailed in the developed world in 2011 prevented additional government stimulus and limited the options for reducing unemployment.
Growth was much more robust in the developing world, which brought up the world average, and made the overall output recovery as robust as any in recent memory. Emerging and developing economies grew 6.2 percent in 2011, boosted by strong macroeconomic fundamentals, structural reforms and growing domestic demand. Asian developing economies were driving the growth, with China and India in the lead; they were followed by emerging Europe and Latin America and Caribbean countries. Nevertheless, on the whole, growth in the developing world slowed down somewhat from the 2010 pace of 7.5 percent. This slowdown was ongoing throughout the year, with each quarter bringing weaker results. The cooling of the Chinese and several Asian economies was the outcome of deliberate tightening policies, while floods in Thailand disrupted the economies in the region in the fourth quarter, and the Middle East and North Africa experienced considerable unrest throughout last year.
The short-term forecast calls for weaker growth in real output of 3.5 percent in 2012, with developed economies growing 1.4 percent and developing economies 5.7 percent. Assuming improving financial conditions, continued monetary stimulus and the successful resolution of fiscal dilemmas, growth should pick up in 2013 to 4.1 percent. There are downside risks associated with these factors, as well as with the potential aggravation of the European situation, further geopolitical uncertainty and sudden movements in commodity prices; all of these factors keep the global situation more fragile than usual. Successful resolution of the European crisis in a way consistent with economic prosperity of the affected countries remains one of the key potential upsides for the global economic recovery. Others include preserving social and political stability in developing Asian economies undergoing controlled deceleration, and a sustained pickup in growth, employment and consumer confidence in the United States.
|Source: IMF World Economic Outlook database, April 2012|
|of which France||-0.2||-2.6||1.4||1.7||0.5||1.0|
|of which Germany||0.8||-5.1||3.6||3.1||0.6||1.5|
|of which Italy||-1.2||-5.5||1.8||0.4||-1.9||0.3|
|of which China||9.6||9.2||10.4||9.2||8.2||8.8|
|of which India||6.2||6.6||10.6||7.2||6.9||7.3|
|of which ASEAN-5||4.8||1.7||7.0||4.5||5.4||6.2|
|of which Russia||5.2||-7.8||4.3||4.3||4.0||3.9|
|of which Brazil||5.2||-0.3||7.5||2.7||3.0||4.2|
|of which Mexico||1.2||-6.3||5.5||4.0||3.6||3.7|
|Middle East & North Africa||4.7||2.7||4.9||3.5||4.2||3.7|
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.
After a strong performance in early 2010, partly based on inventory restocking, growth sputtered almost to a halt in the United States in the first quarter of 2011. After that weak start, the economy gained speed throughout the year and posted 1.7-percent growth for the year as a whole, down from 3.0 percent in 2010. The gain was based primarily on stronger consumer spending. A sharp reduction in import growth eliminated the drag on the economy from the net export side, but lower government spending at all levels held back economic growth.
Consumer spending increased 2.2 percent in 2011 (4.7 percent in nominal terms), adding 1.53 percentage points to real GDP growth. This represented a slight increase over 2010, when it contributed 1.44 percentage points. In 2011, the biggest increase in consumer spending was in services, which added 0.66 percentage point to real GDP and grew 1.4 percent, while spending on durables was close behind with a 0.60-percentage point contribution and 8.1-percent growth. Increased spending in these areas was, however, tempered by slower growth in consumer spending on non-durables, which added only 0.28 percentage point to real GDP growth and grew 1.7 percent.
Non-residential fixed investment picked up in 2011, adding 0.82 percentage point to GDP growth, almost double its contribution in the previous year. This was due to a reversal of the drag on the economy that the lagging investment in structures was contributing until 2010. Growth in investment in equipment and software slowed down, but still added 0.71 percentage point to real GDP growth and increased 10.3 percent on the year.
Residential fixed investment contracted 1.4 percent in real terms in 2011, but less than in the previous years, shaving only 0.03 percentage point off growth as opposed to 0.11 percentage point in 2010. Construction of single-family structures continued to turn down, while construction of multi-family structures decreased less and “other” structures increased.
Inventory investment went from being one of the biggest contributors to economic recovery at 1.64 percentage points in 2010 to being a drag on real GDP in 2011, subtracting 0.20 percentage point from growth. Net exports added 0.05 percentage point to GDP growth in 2011 after subtracting 0.51 percentage point the previous year. A sharp decrease in the growth of imports drove this change and offset a slowdown in export growth.
Government spending fell 2.1 percent in real terms, the largest such contraction in 40 years. A broad-based decline at federal, state and local levels that affected both defence and non-defence spending led to a drag of 0.45 percentage point on real GDP growth. The 2.1-percent decrease in state and local government spending was the largest on record since World War II.
The labor market situation in the United States showed signs of improvement last year, but the rate of job creation remained too slow to recoup the losses sustained during the recession within a reasonable timeframe. The unemployment rate hit a 10.0-percent high in October 2009 and was still at 9.1 percent in January 2011. The unemployment rate languished at that level for most of the year, with no sustained improvement until the fourth quarter, when several good months of job creation drove the unemployment rate down to 8.5 percent by December 2011. The participation rate remained firmly around 64 percent, about 2 percentage points below the long-run historic trend, bearing witness to the large number of discouraged workers who have given up looking for work.2 From the peak of employment in January 2008 to December 2010, 7.7 million jobs were lost in the United States, and by the end of 2011 only 1.8 million jobs had been recouped—not far ahead of the rate of population growth. Additionally, real wage growth was negative for the past two years, further underscoring the challenges for growth in U.S. consumer spending.
The U.S. economy is projected to grow by 2.1 percent in 2012 and by 2.4 percent in 2013. Continuing weakness in the housing sector and the labor market, combined with the deleveraging process, is expected to keep the recovery slow. With domestic factors paramount in the U.S. economic picture, only a modest improvement in the unemployment rate (to 8.2 percent) is expected, a level already reached in March 2012. The output gap will persist, which will keep core inflation in check for the foreseeable future while monetary policy is expected to continue to be accommodating.
Downside risks remain significant. Many tax provisions, including the cuts introduced during the previous presidency, are scheduled to expire in 2013. Should the political difficulties and gridlock in the United States persist until then, failure to renegotiate these as well as the scheduled automated spending cuts may contribute negatively to economic growth. The European sovereign debt crisis is the main foreign influence, primarily through the effects of the possible negative scenario on business confidence and investment in the United States. The housing sector will remain the key element in the recovery, where action on mortgage refinancing, broadly supportive of consumers, could help clear the existing overhang of foreclosures and underwater mortgages and kickstart the much-needed growth in that sector.
Japan’s troubled economy achieved 4.4 percent growth in 2010, the fastest among major advanced nations that year, and its best showing in a generation. Unfortunately, Japan’s success was cut short in 2011 by the Great East Japan earthquake. On top of the widespread devastation caused by the earthquake itself, tsunami and fires multiplied the damage, and the consequent long-term radioactive sore at the Fukushima nuclear plant may yet prove to be the most damaging blow of all. Considering the magnitude of these disasters, the Japanese economy proved very resilient, contracting by only 0.7 percent in 2011. Real GDP fell 7.9 percent in the first quarter, 1.2 percent in the second and then rebounded 7.6 percent in the third quarter, stronger than anticipated. Floods in Thailand in the fourth quarter presented additional shocks to the Japanese economy, bringing down the last quarter’s results to 0.1 percent, and the average growth for 2011 to negative 0.7 percent (all rates annualized).
Trade was the key influence on Japan’s GDP in 2011. The 3.1-percentage point contribution by exports to real GDP in 2010 vanished in 2011, and the drag from imports decelerated somewhat from 1.4 percentage points to 0.8 percentage point as imports grew just 5.8 percent in real terms. The resulting impact from net exports on GDP growth was negative 0.8 percentage point.
Private consumption rose 0.1 percent in 2011 and contributed 0.1 percent to GDP growth. A 0.4-percentage point increase in government consumption (which grew 2.0 percent in real terms) was offset by a decrease of 0.5 percentage point in private inventories and a fall of 0.2 percentage point in public investment (which decreased 3.6 percent in real terms). Private residential and nonresidential investment remained weak, both contributing just 0.1 percentage point to real GDP growth in 2011.
The unemployment rate reached 4.6 percent in December 2011, a fairly high level for Japan. The rate was double among persons aged 15 to 24. Difficulties in the employment situation were partly due to the disasters, and have showed signs of improvement since. Industrial production and the economy as a whole picked up slowly, but exports and corporate profits remained weak, with deflationary risks present. The long-standing issues in the Japanese economy that have stunted its growth for the past two decades still persisted, and the Japanese government continued to focus on combatting deflation and yen appreciation, a combination that could generate a vicious cycle for Japanese producers.
Prospects for Japan are positively influenced by its reconstruction spending; real GDP is expected to grow 2.0 percent in 2012, and moderate to 1.7-percent growth in 2013 as that spending is phased out. Downside risks are very significant, as Japan is vulnerable to a possible intensification of the European debt crisis and stands to lose amounts comparable to its projected real output growth under the unfavorable scenario of decreased external demand. Japan is also vulnerable to possible energy supply issues, such as an oil price spike due to political tensions and the slowing down of activity in the Chinese economy.
The embers of the European crisis continued to smolder in 2011, flaring up on several occasions and projecting uncertainty across the global economy. This uncertainty was the key feature in last year’s global economic performance, and uncertainty will likely continue in the short-to-medium term. This is because the resolution of the sovereign debt crisis in the affected countries could ultimately take several forms and require many years to complete. These forms could range from a fiscal union, to a partial or complete breakup of the common currency zone, to the gradual working out of European imbalances through inflation in the North and deflation in the South, to a combination of these and other solutions.
Largely in response to this uncertainty, growth in the eurozone decelerated from 1.9 percent in 2010 to 1.4 percent in 2011, with consumer spending growing just 0.2 percent in 2011 and government spending remaining flat. Accordingly, the contribution from private consumption to total GDP was minimal at 0.1 percentage point, and zero from government spending. Gross fixed capital formation added 0.2 percentage point to GDP growth, and changes in inventories boosted GDP by another 0.1 percentage point. Net exports provided the largest boost (1.0 percentage point) to real GDP growth.
Germany’s real GDP increased 3.1 percent, France’s by 1.7 percent while Italy showed modest 0.4-percent growth. The renewed fears of escalation of the sovereign debt crisis slowed growth in the fourth quarter sharply and tipped the region back into recession. As a large portion of the sovereign debts of Portugal, Spain and Italy is held by the banks, renewed doubts about the solvency of these countries lowered confidence in the banking sector and drove up the risks associated with financing, which in turn further depressed these economies by restricting private-sector credit. Funding pressures were somewhat alleviated at the end of 2011 by the European Central Bank’s long-term refinancing operations, which stabilized market sentiment and reduced uncertainty. Volatility and sovereign bond spreads retreated for several economies, although not for those directly affected, which were expected to normalize further, but may be driven back up by unforeseen shocks.
With the end-of-2011 recession expected to be shallow and short-lived, the forecast for the eurozone calls for a 0.3-percent contraction in real GDP during 2012 and a weak rebound of 0.9 percent in 2013. Italy, directly affected by sovereign risk, is expected to contract 1.9 percent in 2012 and 0.3 percent in 2013. France is projected to grow by 0.5 percent in 2012 and 1.0 percent in 2013, and Germany by 0.6 percent in 2012 and 1.5 percent in 2013. However, the degree of uncertainty associated with this forecast is unusually large. Continued progress in crisis management and advances towards its resolution, factored into the projections, have not been the pattern for the eurozone so far. As long as the underlying issues are not decisively resolved, renewed escalation of the eurozone crisis will continue to be a strong downside risk. It is also the prime source of risk for the global recovery as the eurozone maintains strong trading and financial links to other regions. The onset of another phase of the crisis may affect the global economy through credit tightening, uncertainty, contraction in trade and declines in commodity prices.
The United Kingdom was particularly hardhit by the Great Recession, as the traditionally large U.K. financial sector had been directly affected by the financial crisis preceding the recession. Output declined 4.4 percent in 2009 and rebounded only 2.1 percent in 2010. Further difficulties were in store for 2011, with growth of only 0.7 percent for the year. Four of the last six quarters (ending with the first quarter of 2012) have now resulted in output contractions. Real GDP in the final quarter of 2011 was no higher than it was in the third quarter of 2010. Output of the production industries fell 1.2 percent in 2011, while services output increased by 1.6 percent.
Household final consumption contracted by 1.2 percent in 2011, imposing a drag of 0.7 percentage point on the real GDP, down from a positive contribution of 0.8 percentage point in 2010. Government final consumption expenditure remained flat for the year, also down from a 0.3-percentage point contribution in 2010. Gross fixed capital formation fell by 1.2 percent in 2011 and slowed down real GDP growth by 0.2 percentage point, down from 0.5 percentage point in 2010.
The only positive contribution to GDP came from net exports, which increased growth by 1.0 percentage point. Exports decelerated from a contribution of 2.1 percentage points in 2010 to 1.3 percentage points in 2011, while imports went down much faster, from a drag of 2.5 percentage points on GDP in 2010 to a drag of only 0.4 percentage point in 2011.
In real growth terms, the United Kingdom’s total exports added 4.6 percent in 2011. Goods exports advanced 5.1 percent, while services exports grew by 3.9 percent. Growth on the import side was muted at 1.2 percent overall; goods imports advanced 1.5 percent and services grew by 0.2 percent.
The United Kingdom is not subject to the sovereign debt problems affecting countries in the eurozone since it has full sovereignty over its currency and absolute control of its monetary policy, which has remained very accommodating. However, proximity to and trading links with the eurozone render the United Kingdom susceptible to European contagion, while the policies of fiscal consolidation continue to impose a drag on its economy. Recovery in the United Kingdom has been slower than during any of the previous recessions—slower even than during the Great Depression. The 0.8-percent growth expected for the United Kingdom in 2012 is close to 2011 levels, but growth is scheduled to pick up to 2.0 percent in 2013.
In 2011, emerging Asia again recorded the fastest real GDP growth of all the regions, at 7.8 percent. This was a deceleration from 9.7 percent in 2010, partly reflecting the process of deliberate cooling of the economy in China and partly the outcome of the disruptions in the regional supply chains occasioned by the natural disasters in Japan in the first quarter and floods in Thailand in the fourth quarter. Weaker external demand also played a role in the slowdown, which progressed gradually throughout the year. Growth was led by China at 9.2 percent (slowing down from 10.4 percent in 2010) and India at 7.2 percent (down from 10.6 percent in 2010). Real GDP among the ASEAN-53 grew 4.5 percent last year, with Indonesia in the lead at 6.5 percent. Real GDP growth in Thailand lost an estimated 2 percentage points following the floods in 2011, resulting in marginal 0.1-percent growth for the year.
Spillovers from the eurozone crisis affected this region, which has forged strong trading links with Europe, dampening the demand for Asian exports. Internal factors were in operation in India, where investment weakened and borrowing costs increased as the monetary policy tightened to combat inflation. However, strong performances in corporate profits and household income in China helped stabilize consumption and investment there, supporting the “soft landing” scenario. The financial repercussions of the European crisis were limited and contained; Asian banks in general ended the year in excellent health and with sufficient extra lending capacity.
The region recovered more strongly than expected from the effects of the earthquake and tsunami that hit Japan in early 2011, showing resilient domestic demand, robust well-managed institutions and room for policy easing. Assuming these factors persist, projections are for an orderly slowdown in China despite weakening external demand. Growth is expected to moderate to 8.2 percent in 2012, and then pick up to 8.8 percent in 2013. Somewhat more uncertainty is associated with India, where the higher interest rates are expected to cool off the economy to 6.9-percent growth in 2012 before growth speeds up again to 7.3 percent in 2013. Similarly, growth in all four Asian NIEs is expected to slow down in 2012 (Hong Kong’s most of all to 2.6 percent) before resuming on a faster growth path in 2013. ASEAN-5 countries should be an exception, however, as expected robust recovery in Thailand and the Philippines, combined with strong domestic demand in Indonesia, are forecast to speed up economic growth among the ASEAN-5 to 5.4 percent in 2012 and then to 6.2 percent in 2013. Other developing Asian countries combined are expected to post 5.0-percent growth in both 2012 and 2013.
Downside risks for emerging Asia are significant. First and foremost, the escalation of the eurozone crisis could potentially shave over a percentage point off emerging Asia’s growth forecast; contagion of the banking systems with increased financial risk and uncertainty is also a possibility. Tensions in oil-producing countries causing another spike in the price of oil would also lead to significant negative effects for the region. On the positive side, efforts directed at strengthening domestic demand may further solidify economic growth in the region based on increased domestic consumption.
Emerging Europe posted strong 5.3-percent real GDP growth in 2011. This performance, however, was driven by Turkey, which grew at 8.5 percent, and is not broadly representative of the whole region. Lithuania (up 5.9 percent), Latvia (up 5.5 percent) and Poland (up 4.4 percent) also grew strongly, while real GDP grew less than 2 percent in Hungary, Bulgaria and Serbia, and growth in Croatia was flat in 2011.
The eurozone crisis, which flared up again at the end of 2011, affected this region primarily through its strong financial links with Europe as well as its production links. The financial sector in emerging Europe is now closely integrated with the Western European banks; many financial institutions operating in Eastern Europe are subsidiaries of the banks headquartered in Austria, France and Italy. However, until the autumn of 2011 the credit supply shocks that followed each increase in sovereign debt risk in Western Europe were not felt in emerging Europe, and credit default swaps (CDS) spreads remained stable as the region was recovering from the Great Recession. Late in 2011, funding pressure on major Western European banks caused them to start another round of deleveraging, leading to a sizeable reduction in their Eastern European assets. Restricted funding from these sources makes growth more dependent on financing from domestic sources and the provision of adequate liquidity in the banking sector.
Trade integration has also increased considerably between Eastern and Western Europe. Western Europe is Eastern Europe’s largest export market and Eastern Europe is the fastest-growing destination for exports from Western Europe. Production chains have sprung up between the regions, with Eastern Europe as an assembly point, particularly for German firms. Consequently, estimates show that a shock to growth in Western Europe has a one-to-one effect on growth in Eastern Europe.
Given such strong linkages, the prospects in emerging Europe are heavily dependent on the events in the eurozone, which was in recession at the end of the year. Accordingly, growth in emerging Europe is expected to slow to 1.9 percent in 2012, with deceleration particularly sharp for Turkey (from 8.5 percent in 2011 to 2.3 percent). Hungary is expected to stall and Croatia to post a negative 0.5-percent growth in 2012. Growth in the region is expected to improve overall to 3.9 percent in 2013, with Turkey and Poland growing at 3.2 percent, Romania and Serbia at 3.0 percent, Hungary at 1.8 percent and Croatia at 1.0 percent.
Latin America and the Caribbean (LAC)
Strong commodity prices in 2011 bolstered the economies in the LAC region and promoted robust growth. LAC countries grew 4.5 percent on average, with Argentina leading the way with 8.9-percent growth.4 Ecuador also grew strongly at 7.8 percent, as did Peru, which posted 6.9-percent growth. Mexico was slower at 4.0 percent, although growth was higher than expected, while Brazil’s growth decelerated to 2.7 percent.
Economic imperatives in the LAC region were different from most of the world. Amidst a general slowdown of world output and exports, overheating was the main regional concern through 2011. Many regional currencies appreciated significantly, none more so than the Brazilian real, which was 45 percent higher than its January 2009 value at one point during the year. Gloomy prospects in many other areas combined with very easy monetary policy in the developed world effectively made Brazil a comparatively attractive investment opportunity, and large capital inflows followed. However, this outcome adversely affected Brazil’s exporters and manufacturers and forced Brazil’s government to introduce certain controls to limit the inflow of capital into the country. The trend was halted at the end of 2011, removing some pressure from the currency, but it was feared the inflows may resume in 2012. Inflation thus remains a concern in South America.
The short-term outlook for the region is moderately positive, with growth of 3.7 percent expected in 2012, increasing to 4.1 percent in 2013. Mexico is forecast to slow down to 3.6 percent in 2012 and 3.7 percent in 2013, with its outlook closely tied to the performance of the United States. Brazil’s growth, which was 2.7 percent in 2011, should pick up to 3.0 percent in 2012 and 4.2 percent in 2013 as overheating risks recede. Argentina is headed for a slowdown to 4.2 percent in 2012 and 4.0 percent in 2013. Central America’s growth is forecast to be 4.0 percent through both years. The Caribbean countries continue to suffer from high public debts and lower remittance and tourism flows; growth there should pick up slowly, to 3.5 percent in 2012 and 3.6 percent in 2013.
The LAC region remains rather insulated from the direct effects of the crises and concerns in the developed world. Commodity prices exert the strongest influence on the regional economy, and through trading channels these prices link the LAC’s economic prospects to the pace of growth in Asia. Financial linkages with European banks are strong, and could potentially transmit European contagion to the LAC’s financial markets. However, so far no reversal of capital flows has occurred in response to Europe’s credit swings, perhaps because LAC’s European subsidiaries are predominantly funded by local deposits, and it is expected that the region’s relative immunity to the financial repercussions of the eurozone’s sovereign debt crisis will likely continue in the near future.
Commonwealth of Independent States (CIS) Economies
Growth was strong in the CIS region throughout 2011, resulting in a 4.9 percent growth performance. Several factors combined for the strong showing: recovering oil and commodity prices, a rebound in agricultural output, and a strong domestic demand. Russia grew by 4.3 percent, Kazakhstan by 7.5 percent, Ukraine by 5.2 percent and Belarus by 5.3 percent.
However, the eurozone crisis had strong spillover effects on this region. As in emerging Europe, the region’s financial sector is very dependent on Western European banks. Significant capital outflows took place in Russia in response to the latest escalation of the eurozone situation, the Russian ruble depreciated and several CDS spreads, particularly for Ukraine, have widened. The contagion was also transmitted through the trading links to Western Europe, with CIS exports weakening and industrial production slowing down.
Despite expectations for relatively high oil prices, the outlook is for weaker growth in the CIS for the next two years— 4.2 percent in 2012 and 4.1 percent in 2013. Russia will slow down to 4.0-percent growth in 2012 and 3.9 percent in 2013. Other energy exporters in the region will perform relatively well: with strong oil prices and investments in infrastructure, Kazakhstan is on track for 5.9-percent growth in 2012 and 6.0 percent in 2013, while growth in Uzbekistan is expected to slow down to 7.0 percent in 2012 and 6.5 percent in 2013. Turkmenistan should grow 7.0 percent in 2012 and 6.7 percent in 2013.
Energy-importing CIS countries will experience slower growth as a group due to weaker export demand, financial crisis spillovers and tighter monetary and fiscal conditions. Real GDP in Ukraine is projected to increase by 3.0 percent in 2012 and speed up to 3.5 percent in 2013. Belarus is also projected to grow by 3.0 percent in 2012 and by 3.3 percent in 2013.
Inflation is expected to moderate across most of the region with the slowdown in economic activity and improvements in agricultural output, although Belarus will still experience problems with inflation caused by depreciation, despite the monetary and fiscal tightening. Potential spillovers from further eurozone developments through both financial and trading links remain an acute risk factor in the region. The health of the Russian economy remains crucially important for the rest of the region, as Russia is a large source of remittances and foreign investment for most CIS countries.
Middle East and North Africa
Growth in the Middle East and North Africa was just 3.5 percent in 2011, reflecting a number of internal challenges to growth. After a relatively good performance during the Great Recession, this region is now buffeted by unforeseen turbulence. Political and social unrest, which resulted in the fall of several governments and, in extreme cases (e.g. Libya), in civil war, stalled internal economic growth and interfered with important trade, remittance and travel links with Europe. Additionally, the long-standing structural problems within these economies will require structural reforms to spur growth in the long term.
The economies of oil exporters as a group grew 4.0 percent last year, supported by strong oil prices. Iran grew only 2.0 percent, reflecting problems with the harvest and subsidy reform. Saudi Arabia grew 6.8 percent, Algeria 2.5 percent and the United Arab Emirates 4.9 percent. Sudan’s contraction continued at 3.9 percent. Oil importers fared less well, with only 2.0-percent growth, held back by the effects of unrest in Egypt (where growth was up 1.8 percent) and Tunisia (down 0.8 percent). Israel grew 4.7 percent on the year.
The outlook for oil exporters differs substantially from that of oil importers. The former have been able to repair their shaken fiscal balances, while debt levels for the latter have been steadily deepening. On the other hand, social transfers have gone up considerably for the oil exporters, further locking in their dependence on high oil prices. The continued impact from Europe’s weakness affecting tourism and trade flows, remittances, and travel spending will hold down the region’s overall growth prospects in the short term. Oil prices remain the major influence on the expectations for the region; prices may be depressed by prolonged European weakness or rise if oil supplies are disrupted as a result of continuing geopolitical tensions in the region, especially further armed unrest.
Oil-exporting economies are projected to grow 4.8 percent in 2012 and 3.7 percent in 2013. Iran will slow down to just 0.4 percent in 2012 and 1.3 percent in 2013. Saudi Arabia will post 6.0-percent growth in 2012 and 4.1 percent in 2013, while Algeria will accelerate by 3.1 percent and by 3.4 percent in the next two years. A major recession is under way in Sudan where a 7.3-percent decline in GDP is forecast for 2012, moderating to a 1.5-percent decline in 2013. Oil importers, meanwhile, will accelerate to 2.2 percent in 2012 and nearly catch up with oil exporters with 3.6-percent growth in 2013. A slow recovery is expected in Egypt with 1.5-percent growth in 2012 and 3.3 percent in 2013; Tunisia is expected to rebound to 2.2 percent in 2012 and 3.5 percent in 2013; and Israel will slow down to 2.7 percent in 2012 before speeding up to 3.8-percent growth in 2013. The region as a whole is expected to undergo 4.2-percent growth in 2012 and 3.7 percent in 2013.
One of the best-performing regions during the global recession, Africa recorded another year of strong growth and was relatively immune from the uncertainties in financial markets and worsening global conditions at the end of 2011. Growth was 5.1 percent, with oil-exporting countries growing faster at 6.2 percent, middle-income countries the slowest at 3.9 percent (including South Africa with 3.1 percent growth), and the poorest countries doing very well at an average 5.8-percent growth. Ghana’s first year of oil production resulted in growth of 13.6 percent. Nigeria performed well at 7.2 percent in 2011, as did Ethiopia at 7.5 percent and Democratic Republic of Congo at 6.9 percent.
High commodity prices ensured growth was stable during 2011. Limited financial links with Europe insulated this region from most of the adverse developments of 2011— with the exception of South Africa, whose financial system was affected by volatility and the depreciation of the rand. Trading links with Europe have been weakening in the last few decades, allowing diversification toward the fast-growing emerging markets and dampening contagion from the eurozone crisis. Strong investment in natural resource extraction continued.
South Africa’s growth decelerated rapidly, reflecting the stronger financial and trading links between this relatively advanced economy and Europe. Unemployment remains high, and growth is expected to moderate further in the largest economy in the region to 2.7 percent in 2012, but should improve to 3.4 percent in 2013. As the global demand for diamonds slows down, so will Botswana’s growth: projections are for 3.3-percent growth in 2012 and back up to 4.6 percent in 2013. Ghana’s growth will moderate somewhat to 8.8 percent in 2012 and 7.4 percent in 2013. Tighter fiscal and monetary policies will restrict growth in the nonoil sector in Nigeria, but higher oil output is expected to compensate leading to a robust 7.1-percent growth in 2012 and 6.6 percent in 2013. New oil reserves coming on-stream in Angola will speed up growth there to 9.7 percent in 2012, which will moderate to 6.8 percent in 2013.
Sub-Saharan Africa remains well insulated from the European crisis, except for South Africa, which may transmit negative shocks to the rest of the region. The risks of inflation and fiscal deficits remain; the outlook for these will largely depend on global food and commodity prices, respectively.
Assumptions and Risks
As indicated earlier, all projections in this chapter are based on the IMF’s April 2012 World Economic Outlook. In making its projections, the IMF has made a number of technical assumptions that underpin its estimations. Key among these assumptions are that: 1) real effective exchange rates will remain constant at their average levels during February 13–March 12, 2012, except for the currencies participating in the European exchange rate mechanism II (ERM II), which are assumed to have remained constant in nominal terms relative to the euro; 2) established fiscal and monetary policies of national authorities will be maintained; and 3) the average price of oil per barrel will be US$114.71 in 2012 and US$110.00 in 2013 and will remain unchanged in real terms over the medium term. The Outlook also proposes a number of working hypotheses involving levels of various deposit rates in the world’s financial markets. Interested readers should consult the Outlook for further details on these and other technical assumptions.
For the most part, the assumptions made by IMF modelers are based on officially announced budgets, adjusted for differences between the national authorities and the IMF regarding macroeconomic assumptions and projected fiscal outcomes, with medium-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.
One of the key factors in the global economic situation is the price of oil. While the assumption is that oil prices will remain in the vicinity of $110 a barrel, the IMF has examined a scenario involving a potentially adverse shock that could disrupt the oil supply. Assuming that Iran’s oil exports to the OECD countries halt suddenly and are not offset by the increased output elsewhere, the initial oil price increase could be between 20 and 30 percent, with further uncertainty about oil supply disruptions increasing the price still further—to an average of 50 percent over the projected value for the next two years. Such a development would slow down the recovery in private consumption and investment growth globally, with the exception of net oil exporters. Global output would contract by over 1 percent, and various spillovers, such as falling confidence in financial markets, could further worsen the damage.
The other key risk is that escalation of the eurozone crisis could potentially increase bank and sovereign stress, which in turn could affect other regions in proportion to their trading and financial involvement with Western Europe. The most affected areas would be the CIS and emerging Europe, with North America also exposed through financial links and Asia exposed through trading links. Other risks include deflationary pressures in parts of the eurozone, high budget deficits in the United States and Japan, and unwinding credit booms in some emerging market economies. Upside risks include better than expected recovery in the United States and the eurozone, lightening of geopolitical tensions and the consequent easing in the price of oil.
Overall, although the global economy remains unusually fragile, the risks to growth are now somewhat lower than at the end of 2011. This reflects smaller dispersion in the expectations for oil prices, term spreads and general volatility. According to the IMF, the risk of a serious global slowdown in 2012 is now very small (about 1 percent).
1 Statistics, estimations and projections in this chapter come from the International Monetary Fund’s World Economic Outlook, April 2012, supplemented by statistics from the U.S. Bureau of Economic Analysis, Statistics Canada, the Japan Cabinet Office, the European Central Bank, the U.K. Office for National Statistics, and the World Economic Outlook April 2012 database.
2 The unemployment rate was driven down to 8.2 percent by March 2012, but this was partially due to another decrease in the participation rate, which reached 63.8 percent that month, a level last seen in 1983.
3 The IMF defines the top 5 members of the Association of Southeast Asian Nations (ASEAN) as ASEAN-5, which comprises Indonesia, Malaysia, Philippines, Thailand and Vietnam.
4 Based on Argentina’s official GDP and consumer price index data. According to the IMF, this figure may overstate real GDP growth in the country.
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