Recovery Ahead?

If everything breaks right, the global economy could grow by 4 percent in 2011.

The outlook for the global economy in 2011 is, partly, for a persistence of the trends established in 2010. That means an anemic U-shaped recovery in advanced economies, as firms and households continue to repair their balance sheets, and a stronger V-shaped recovery in emerging-market countries, owing to their better macroeconomic, financial, and policy fundamentals. It adds up to close to 4 percent annual growth for the global economy, with advanced economies growing at around 2 percent and emerging-market countries growing at about 6 percent.


What's the global economic outlook for 2011?

But there are downside and upside risks to this scenario. On the downside, one of the most important risks is further financial contagion in Europe if the Eurozone's problems spread—as seems likely—to Portugal, Spain, and Belgium. Given the current level of official resources at the disposal of the International Monetary Fund and the European Union, Spain now seems too big to fail yet too big to be bailed out.

The United States represents another downside risk for global growth. In 2011, the United States faces a likely double dip in the housing market, high unemployment and weak job creation, a persistent credit crunch, gaping budgetary holes at the state and local level, and steeper borrowing costs as a result of the federal government's lack of fiscal consolidation. Moreover, credit growth on both sides of the Atlantic will be restrained, as many financial institutions in the United States and Europe maintain a risk-averse stance toward lending.

In China and other emerging-market economies, delays in policy tightening could fuel a rise in inflation that forces a tougher clampdown later. China, in particular, risks a hard landing. There is also a risk that capital inflows to emerging markets will be mismanaged, thus fueling credit and asset bubbles. Moreover, further increases in oil, energy, and commodity prices could lead to negative terms of trade and a reduction in real disposable income in net commodity-importing countries—while adding to inflationary pressures in emerging markets. Continue ►