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UPDATED: August 30, 2010 NO. 35 SEPTEMBER 2, 2010
Economic Outlook Up in the Air
Global economic recovery still in jeopardy
LIU YUNYUN
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ON SALE: A visitor passes by a sale at a clothing shop in Japan's prosperous Shinyuki business district (XINHUA/AFP)

Global economic performance in the first half of 2010 showed the financial crisis is far from over and the road to real recovery is bumpy. Zhao Jinping, economic researcher at the Development Research Center of the State Council, says that the possible implementation of exit strategies in developed countries may deal a heavy blow to a global rally and thus China's export growth will slow down. Zhao published his opinion in China Economic Times. Edited excerpts of the first part on world economy follow:

I. Slow-paced recovery for the second half of 2010

The economic rally has continued in major economies. The first quarter GDP growth of the United States stood at 2.7 percent, driven by fast consumption growth and increased inventory. This round of U.S. economic recovery grew faster for two reasons: a weak comparison base in the first quarter of last year and the stronger-than-ever financial and economic stimulus measures.

From the point of view of general demand (consumption and equipment, property investment and exports), consumption and export increases were two major reasons for the strong U.S. economic recovery, meaning the current fast growth is a result of domestic tax breaks and effective foreign economic stimuli. The positive export performance was in line with the United States' target of doubling its exports, but could also mean the U.S. economic rally was largely influenced by external market demands. In April, U.S. industrial production rose 5.2 percent year on year, beating the monthly growth of the first three months. But the non-manufacturing indexes showed an obvious slowdown, suggesting that second quarter economic growth would slacken. The IMF's April economic outlook report predicted the 2010 U.S. economy would grow 3.1 percent from 2009, 0.4 of a percentage point higher than its forecast in January. But on July 8, the IMF adjusted its forecast upward by 0.2 of a percentage point. The readjustment was largely influenced by positive expectations built on the U.S. consumption recovery and export growth, which was propelled by the strong economic growth in China and other emerging countries.

All of Europe is suffering from the aftermath of the sovereign debt crisis, stemming from southern European nations like Greece, Spain and Portugal. Among the three countries, Spain's economy is the biggest in scale, with its 2009 GDP standing at $1.5 trillion and accounting for 8.9 percent of the EU's total. The GDP of the three countries made up 12.3 percent of that of the EU and 3.5 percent of the global total. Therefore, the three economies' potential influence on EU and global economic growth is limited. From the perspective of trade relations, exports from EU core members, such as Germany, Britain, France and Italy, to those three nations are not enough to hit their own economy. For instance, their exports to Spain account for just 4-8 percent of their total and thus, their economy will not be devastated, even if Spain's economy goes down.

On the contrary, the continuous depreciation of the euro has boosted eurozone countries' exports to other regions, exerting a positive influence on the eurozone's real economy. If the sovereign debt crisis could be contained within a controllable range, major eurozone economies will keep on track of slow recovery. In the first quarter of 2010, the real economic growth in the eurozone reached 0.8 percent, the third consecutive quarterly growth. In April, the IMF forecasted a 1-percent year-on-year growth for the eurozone in 2010, and has since maintained this forecast. This means the IMF is not optimistic about the EU's economic outlook, despite its slow recovery.

Japan has recorded four consecutive periods of quarterly growth. The first-quarter growth for 2010, reaching 5 percent, was driven mainly by consumption and robust foreign demand. Strong exports to emerging markets in Asia have been a major driver of the fast export recovery of Japan. Its growth in consumption is largely maintained by stimulus measures to encourage the consumption of energy-saving durable goods. Since the second quarter of this year, economic outlook indexes on the Japanese economy have all declined, leading to suspicion that the country's economic growth would slow down to some extent. On July 8, the IMF forecasted a 2.4-percent growth of the Japanese economy in 2010, up 0.5 of a percentage point and 0.7 of a percentage point from its previous forecasts in April and January, indicating the IMF's increasing optimism for the Japanese economy.

Since the beginning of this year, emerging economies like China, India, Brazil and Russia have maintained robust economic recovery, mostly propped up by exports and domestic consumption. The IMF's latest economic forecasts for those countries have all been higher than previous estimates. It hiked up the GDP growth rates of China, India and Brazil by 0.5, 0.6 and 1.6 of a percentage point, respectively.

Judging from the above-mentioned cases, although the European debt crisis has damaged investor confidence and caused intense fluctuations in financial markets, the trend of global economic recovery has not been reversed. On July 8, the IMF upgraded the world economic growth in 2010 to 4.6 percent year on year, up 0.4 of a percentage point from its forecast in April.

II. Intensified global financial risks and uncertainties in economic recovery

Compared with the first half, uncertainties in world economic rally will increase in the second half. First of all, possibilities remain that the sovereign debt crisis will continue to deepen and become more rampant. As a matter of fact, substantial fiscal deficits and excess public debts do not exist solely in the three southern European countries, as many other European countries have the same problem. Outstanding U.S. Treasury bonds have surpassed $13 trillion, about 90 percent of the U.S. GDP, and there are looming risks of local government debt problems. The public debt ratio of Japan has always been the highest among developed nations. With its massive stimulus package in 2009, the ratio could be as high as 200 percent of its GDP sometime in 2010. Obviously, the sovereign debt crisis is spreading to other European countries, as well as to the United States and Japan. A second outbreak in the global financial crisis is possible.

Second, the tightening measures to be adopted by European countries will drastically reduce their demand for imports. This will lead to an economic slowdown in export-oriented economies in the Asia-Pacific region. If other developed economies like the United States and Japan withdraw their aggressive fiscal policies, which are being used to reverse their worsening financial status, the world economic recovery and market demand rally will be greatly impacted. Therefore, a "double dip" recession in real economy is possible.

Last but not the least, major economies are facing other downward pressures. In the United States, export-propelled growth will be challenged by the rapid appreciation of the dollar against the euro. The gloomy employment situation is more salt in the economic wound. The mortgage problem and deflation pressure remain unresolved. All of this will hamper the U.S. economic recovery process. In Europe, stringent liquidity, massive non-performing assets and high unemployment rates are major risk factors, in addition to the sovereign debt crisis. Japan faces deflation pressure and uncertainties in overseas markets. The emerging markets will encounter multiple pressures of inflation, asset bubbles, exchange rate fluctuations and shrinking international demand.

(To be continued in our issue No. 37)



 
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