Building up economic confidence
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Financial considerations will dominate policies next year because of a lack of credit, say academics.
The present global economic and financial crisis is not merely the most severe episode of economic downturn and financial distress since the Great Depression.
It represents a stark reminder that the global economy is undergoing important transformations. Financial systems, policymaking by governments and central banks, the relative weight of emerging economies, and the global financial architecture are all in flux.
Defining scenarios for 2011 requires a careful consideration of how each of these moving parts will affect the overall structure and performance of the global economy.
Financial matters will continue to dominate policymaking debates during 2011 for several reasons.
The main one is that the economic recovery, especially in the richest countries, is being delayed and undermined by the persistent problems with credit flows. Within the financial system, the continuing lack of confidence among financial intermediaries, especially banks, has diminished the expected positive effects of low interest rates and quantitative easing by central banks.
In addition, trust between financial institutions and non-financial firms has not yet been rebuilt. The amount of credit flowing around the economy is not enough to sustain the incipient recovery.
The stress tests conducted in Europe during the spring of 2010 were meant to restore confidence in financial institutions and to help return the financial system to a state approaching normality. Still, liquidity is not moving easily around the economy, even with the additional efforts being undertaken by central bankers.
Emerging economies
While the richest economies cope with slow growth, persistently high unemployment and financial volatility, the emerging economies are surging ahead, increasing their share of global production, savings, and consumption. Growth rates in Asia, Latin America, the Middle East, and Africa are poised to exceed those in Europe, the United States and Japan in 2011 and beyond. Perhaps the most surprising case is that of the economies of Latin America. This is the first major global financial crisis since the collapse of the Bretton Woods system in the 1970s during which the economies of the region have not been near the epicenter of the financial turbulence.
Latin America will grow in 2010 by more than 5 percent and in the vicinity of 4 percent in 2011, a slowdown caused by weak demand from two of its major customers, the US and Europe. It is also important to note that this growth scenario in Latin America is free from the historically severe macroeconomic imbalances afflicting the region. Brazil has consolidated its position as one of the most relevant actors on the global financial and economic scene. Brazil's outstanding economic policies in recent years, which will help the economy grow this year by just over 7 percent and about 4 percent in 2011, will remain a benchmark for many other emerging economies. Moreover, Brazil is not only exporting raw materials or semi-processed goods, but also such high-tech items as regional jets, automotive components, and sugarcane ethanol.
Emerging economies are increasing their exports to other emerging economies, a sign that their economic bonanza may become self-sustaining. In addition, domestic consumption is growing as both the government and households spend on goods and services. For instance, retail sales in the emerging economy have grown by nearly 60 percent since the beginning of 2007, compared with almost no growth in the advanced economies. The rise of a large middle-class of consumers and savers in countries such as China, India and Brazil will be felt around the world. It goes without saying that companies all over the world will need to adjust their product designs, production locations, and marketing and distribution strategies to this important new development.
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