World Economy Picks Up Again, but with Little Momentum

Press Release March 15, 2012

 
Global economic growth has decelerated significantly towards the end of 2011. While the pace of decline in indicators of global economic activity initially was reminiscent of the dramatic drop in activity indicators in the 2008 financial crisis, there are now signs of a turning point. In recent months the probability of a massive economic downturn has decreased considerably. At the same time, the economic outlook has increasingly been clouded by the renewed rise in oil prices. Hence, we have not significantly revised our expectations for global growth since last December. We maintain our forecast of an increase in global output of 3.4 percent in 2012. For 2013 we still expect a gradual acceleration to 3.9 percent (December forecast: 4.0 percent). However, we now assess the risks to the outlook to be broadly balanced, whereas downside risks were clearly dominating in the outlook last December.

In the last quarter of 2011 global GDP growth slowed to an annualized rate of 2.2 percent, down from 3.5 percent in the previous quarter (Figure 1). The sharp decrease in economic sentiment (as indicated by the IfW indicator of global economic activity) in the second half of 2011 was reminiscent of the steep drop in activity indicators in the 2008 financial crisis but confidence seems to have started improving recently. In addition, in recent months world trade, global industrial production and share prices across the globe suggest that the world economy is about to turn around.

World Economic Activity 1998–2012

Quarterly data. The indicator is based on economic sentiment indicators from 43 Countries. 
GDP: Volume, seasonally adjusted, annualized quarter-on-quarter growth rate, based on 46 countries.

Source: National sources; own calculations.

While risks from the sovereign debt crisis in the euro area have decreased as contagion of financial stress has been limited in contrast to the 2008 financial crisis episode, the recent rise in oil prices will weigh on global growth going forward. Monetary policy in the advanced economies will remain clearly stimulative over the forecast horizon and should gradually become more effective, especially in countries with improving labor markets and brightening income perspectives. Fiscal policy on the other hand remains restrictive in the advanced economies. Reducing structural government deficits is currently especially high on the agenda in the euro area but fiscal consolidation is expected to proceed over the forecast horizon also in the United States and the United Kingdom. In the emerging economies the considerable scope for monetary policy to lower interest rates will be used only cautiously as inflation is generally still undesirably high.

Outlook: Gradual acceleration of world economic growth

Since late 2011, the outlook for the global economy has stabilized and in key regions the economic expansion has strengthened again. This has played out largely as expected. Therefore we do not upwardly revise our forecast for global GDP growth. A number of factors continue to limit the growth momentum in the world economy, including substantially restrictive fiscal policies and continued deleveraging in the private sector in major advanced economies. Adding to this is the renewed rise in oil prices. That said, we now assess the probability of a noticeably stronger than expected global economic expansion similar to that of a less favorable development, whereas downside risks were clearly dominant in our forecast last December.

Economic growth in the advanced economies will be relatively modest in the first half of 2012 and gradually gain momentum thereafter. The euro area is expected to leave the recession behind in the course of this year, but recovery is likely to remain sluggish. GDP growth in the United States is forecast to continue to be moderate at about 2 percent (Table). Overall, we expect output in the advanced economies to increase by 1.2 percent this year, following 1.6 percent last year. In 2013, economic expansion is expected to be slightly stronger, at 2 percent. This is, however, still below historical trend growth and will not be sufficient to meaningfully reduce unemployment.

Weak growth of demand in advanced economies will thus continue to restrain economic growth in the emerging countries over the forecast period. At the same time, the momentum of domestic demand growth in the emerging economies should gradually increase going forward due to increasing economic policy stimulus and diminishing uncertainties regarding the outlook in the advanced economies. As a result, economic growth in the emerging economies should gradually accelerate and remain relatively strong this year and next. All in all, we forecast global output to increase by 3.4 percent in 2012, down from 3.8 percent in the previous year. For 2013 we again expect modestly stronger growth of 3.9 percent.

GDP and Consumer Price Inflation in Selected Countries and Regions 2011–2013

Summary of the Kiel Discussion Papers 502/503 by Klaus-Jürgen Gern, Nils Jannsen, Martin Plödt, Björn van Roye, and Joachim Scheide „Weltkonjunktur zieht wieder etwas an“.

Contact: Prof. Dr. Joachim Scheide and Dr. Klaus-Jürgen Gern