Global economy: Growth slips down a gear

The global economy has bounced back strongly over the past one-and-a-half years: global trade and industrial production are now roughly back where they were before the financial and economic crisis struck. Industrial production has managed to shrug off a slump of 12%, while global trade has clambered back from a 21% nosedive. To date, the recovery has been very much a two-speed one. In emerging Asia and in parts of Latin America, we have seen a more or less classic V-shaped rebound. By contrast, the recovery in the large industrialized countries has so far been relatively weak, leaving the level of economic activity well below its previous trend and unemployment rates uncomfortably high. Ultimately, the varying pace of the recovery reflects the degree to which the countries were hit by the financial crisis.

Current economic indicators suggest that economic momentum has passed its peak. While economic recovery continues, it is proceeding at a more measured pace than in recent quarters. There are a number of reasons for this:
•The very strong growth momentum witnessed in many countries over the last few quarters has to be viewed, in part, in the context of the abrupt economic slump (in late 2008) that preceded it. Obviously, this sort of growth momentum is impossible to maintain once the economy has made up for a major part of the losses triggered by the confidence shock. A slowdown has to be expected with respect to inventory demand and the speed of world trade expansion. 
•The growth seen in recent quarters was fanned by economic stimulus packages that are now gradually being unwound. So the global economy will have to do without this source of stimulus in the future. And that's not all: the sovereign debt crisis in the euro area has drastically exposed the profound fiscal challenges facing many industrial economies. Fiscal tightening, which in some countries like Greece, Spain, Ireland or the UK is quite drastic, is likely to put a damper on economic growth for some time to come.
•Past experience suggests that recoveries from recessions triggered by financial crises tend to be slower than normal as it takes time for nonfinancial and financial sectors alike to de-leverage and repair their balance sheets.

Dr. Michael Heise

PDF (36 kb)