Signs of a Thaw?
The International Monetary Fund (IMF) believes that the world is beginning to pull out of its worst recession since World War II. Still, economic activity over this year and next will remain sluggish and well below its potential growth rate, as banks continue to repair their balance sheets and households rebuild their savings. Moreover, the global nature of our current economic problems suggests that few countries will find trade an outlet for their economic troubles. All in all, the risks to the outlook still remain more heavily weighted toward the downside than the upside.
The IMF now anticipates that economic activity among the advanced countries will contract 3.8 percent this year before growing 0.6 percent in 2010. While most developed countries should experience some growth next year, the euro area is likely to continue to contract. The slow overall growth in 2010 will still leave real economic activity among the developed countries below potential levels. As a consequence, unemployment will likely keep rising.
Emerging and developing countries, as a group, are likely to grow 1.5 percent in 2009. This number masks a wide dispersion in economic performance across these countries. Some, like Mexico and Russia, will experience sharp contractions while others, like China and India, will hardly notice the dip in their economic paths. The IMF expects the emerging and developing countries to grow 4.7 percent in 2010 with all countries participating.
Price pressures have moderated, although some commodity prices—notably petroleum and metals—have recently firmed. As long as economic activity remains below its potential, inflation should stay subdued. Still, inflation remains a concern to many economists. Potential is not an easy concept to measure even in the best of times. The lack of investment and the global distortions that have accompanied the current recession could leave potential growth lower than we might anticipate from past trends. At the same time, many countries have invested heavily in monetary and fiscal policies to stimulate aggregate demand. Developing exit strategies before aggregate demand clashes with its potential could help avoid inflation.