Political Risk Latin America Blog @PolRiskLatam

Mild Slowdown of the Global Expansion, and Increasing Risks

Posted in News and Articles, Political Risk by politicalrisklatam on June 21, 2011

by The International Monetary Fund, June 17th, 2011.

Activity is slowing down temporarily, and downside risks have increased again. The global expansion remains unbalanced. Growth in many advanced economies is still weak, considering the depth of the recession. In addition, the mild slowdown observed in the second quarter of 2011 is not reassuring. Growth in most emerging and developing economies continues to be strong. Overall, the global economy expanded at an annualized rate of 4.3 percent in the first quarter, and forecasts for 2011–12 are broadly unchanged, with offsetting changes across various economies. However, greater-than-anticipated weakness in U.S. activity and renewed financial volatility from concerns about the depth of fiscal challenges in the euro area periphery pose greater downside risks. Risks also draw from persistent fiscal and financial sector imbalances in many advanced economies, while signs of overheating are becoming increasingly apparent in many emerging and developing economies. Strong adjustments—credible and balanced fiscal consolidation and financial sector repair and reform in many advanced economies, and prompter macroeconomic policy tightening and demand rebalancing in many emerging and developing economies—are critical for securing growth and job creation over the medium term.

The global economy has continued to expand

Despite some negative surprises, global growth attained an annualized rate of 4.3 percent in the first quarter of 2011, broadly as expected in the April 2011 World Economic Outlook (Figure 1:CSV|PDF, top panel; Table 1). The outturn was underpinned by many unanticipated offsetting factors. Key among the negative surprises was the devastating effect of the earthquake and tsunami on the Japanese economy, with supply disruptions weighing heavily on industrial production, and consumer sentiment and spending. Growth also disappointed in the United States, in part due to transitory factors—including higher commodity prices, bad weather, and supply chain disruptions from the Japanese earthquake on U.S. manufacturing. In contrast, growth surprised on the upside in the euro area, powered by more upbeat investment in Germany and France. Growth in emerging and developing economies evolved as expected, but with considerable variation across regions. Global employment continued to pick up, including in many advanced economies (Figure 2CSV|PDF).

Figure 1

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