World Overview.

Holland, Dawn ; Barrell, Ray ; Delannoy, Aurelie 等

The pace of global expansion moderated somewhat in the second quarter of 2010. According to NIESR estimates, world GDP increased by 1.4 per cent in the first quarter of the year and growth slowed to 1 per cent in the second quarter. The slowdown was widespread across Asia and America. Many of the lagging economies in Europe, on the other hand, accelerated in the second quarter of 2010, allowing some convergence in the global recovery. The slowdown in Asia and America was largely a reflection of a shift in the global balance of trade. Domestic demand growth in both the US and China accelerated in the second quarter, pulling in higher levels of imports and drawing with it an export-driven recovery in Europe. We forecast global growth of 4.9 per cent this year and 4 1/2 per cent in 2011.

Figure 1 illustrates the path of global output and output in the OECD and non-OECD economies from the prerecession peak of the second quarter of 2008 to the beginning of 2011, which includes three quarters of forecast. The non-OECD economies suffered essentially no decline in output, with the cumulative decline in world GDP of 2 1/2 per cent driven entirely by the downturn in advanced economies. At the global level, output regained pre-crisis levels by the end of 2009, while OECD output remained some 1.7 per cent below peak levels in the second quarter of 2010. We expect the OECD to recover its level of output at the start of 2011, five quarters after the recovery at the global level. By this time output in the non-OECD economies is expected to stand 13 per cent above its level in the second quarter of 2008.

Figure 2 illustrates this point more directly for individual economies. We compare the cumulative output loss suffered between the second quarter of 2008 and the recession trough in the four largest emerging market economies with that in the four largest OECD economic areas. We also compare the level of output reached in the second quarter of 2010 to its level in the second quarter of 2008. The first thing to note is that neither China nor India suffered any decline in output in 2008 or 2009, although growth did slow significantly for a short period. The output decline in Brazil was severe, but short-lived, with a cumulative decline in output of 3.2 per cent. By contrast, output declines in the advanced economies ranged from 3.2 per cent in Canada to 8.1 per cent in Japan. Within this sample, Russia suffered the most severe output contraction, with a cumulative loss of output of 10.9 per cent, highlighting the sharp divergence between Russia and the other emerging markets.

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Of the advanced economies, only Canada had managed to regain pre-crisis levels of output by the second quarter of 2010. By contrast, output in China stood nearly 20 per cent above its level at the start of 2008, while output in India was up by more than 15 per cent. This clearly demonstrates the significant gains in global GDP share that have been made by China and India over the past two years. As a result, we have brought forward our estimate of the date we expect China to overtake the US as the world's largest economy to 2019 from our pre-crisis estimate of 2022.

Emerging market economies have also led the recovery in world trade, which has nearly recovered its pre-crisis peak. The unprecedented collapse in world trade at the end of 2008 allowed the ratio of world trade to world output to decline by more than 3 percentage points, as illustrated in figure 3. This implied a sharp drop in import penetration ratios on a global scale. The rebound in world trade has originated in import demand from emerging markets in Asia, South America, the Middle East and Africa, as well as a small group of OECD economies, which includes Australia, Germany, the Netherlands, Korea and Switzerland. Import volumes in the US and most other advanced economies remain depressed relative to their precrisis levels, as do those in most emerging economies of Europe and the Commonwealth of Independent States. Import demand in the Baltic States and Greece remains more than 20 per cent below pre-crisis levels, suggesting a long-term loss of trade linkages.

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By the second quarter of 2010, more than 60 per cent of the decline in global import penetration had been recovered. We expect the rapid rate of recovery to continue in 2011, bringing the ratio of world trade to GDP back to pre-crisis levels by the end of the year, with world trade forecast to expand by 13 1/2 per cent this year and over 10 per cent in 2011. From 2012 we expect more moderate growth in world trade, although a positive margin over GDP growth should allow world trade as a per cent of GDP to rise by about 0.35 percentage points per annum over the forecast horizon.

Given the relative strength of emerging market economies and loose policy stance in the advanced economies, it is not necessarily surprising that many emerging currencies have come under upward pressure recently. Real effective exchange rates in Brazil, India, South Africa and, to a lesser extent, China and other Asian emerging markets have all appreciated since 2008. Even the struggling Russian economy has appreciated slightly in real terms since 2008, although this is more a reflection of oil price movements. In recent months, exchange rate movements have clearly been indicative of a weak US$ rather than strong emerging currencies. The dollar has depreciated against all the main global trading currencies since the second quarter of 2010, some of which are illustrated in figure 4.

The strongest appreciation has been recorded by the Japanese yen, which has appreciated by 25 per cent against the US$ since its average value in 2007. This has put severe pressure on the profit margins of exporting firms, which have absorbed more than half of the exchange rate rise. The Australian dollar has also appreciated sharply, reflecting the robust recovery in Australia, where interest rates have risen by 150 basis points since mid-2009. The rise in the Brazilian real can also be partly attributed to interest rates rising relative to the rest of the world, as well as the discovery of new oil field reserves.

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The policy stance in the US has loosened in recent months relative to the stance in Europe. This is evidenced by the differences in both fiscal and monetary rhetoric coming from the two sides of the Atlantic. While both the US and European economies have stressed the need for fiscal retrenchment, the US administration is less convinced of the need for immediate tightening measures, maintaining a loose stance until next year. European economies, on the other hand, have been keen to take early action to ward off rising government bond yields.

The Federal Reserve has also made clear its intention to keep interest rates on hold for an extended period and an intention to implement additional easing measures if deflationary signs materialise. Markets currently expect the ECB to start raising interest rates in the first quarter of 2011, while rates in the US are expected to begin rising one quarter later.

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Box A: Recessions and price level targeting

The recent Federal Reserve Board Open Markets Committee meeting in
the US discussed alternatives to the standard inflation targeting
regime that they and many other central banks had been using during
the Great Moderation between 1992-2007. The obvious extension that
they are considering is Price Level Targeting (PLT) which has a
number of advantages over a simple inflation targeting regime.
These advantages are discussed in Barrell and Dury (2000) for
instance, and can be analysed using our model, NiGEM.

During the Great Moderation central bankers and many economists
became convinced that they had changed the world they lived in by
adopting a simple feedback rule for monetary policy in combination
with rules for fiscal policy that kept debt in bounds. The simple
feedback rule was based on the Taylor Principle (TR) that when
inflation increases the central bank should increase the interest
rate more than in proportion to the rise in inflation, and hence
the real interest rate would rise and help choke off demand. In a
forward looking world it is possible to improve on this principle.
If agents see the central bank as fully credible, then the
announcement of a price level target, rather than just an inflation
target, will stabilise fluctuations in output and in inflation.
This can be particularly important in a recession with deflation.
If there is a large shock to demand from a banking crisis, for
instance, an inflation targeting central bank will allow the price
level to fall whilst it loosens monetary policy to get inflation
back up to target. A price level targeting central bank will loosen
policy more rapidly as it has to get the price level back to
target. The converse will be true in a boom. If all actors have
rational expectations and are aware of the different targets then
they will anticipate the deflation from the inflation targeter but
not from the price level targeter, and the output effects will be
greater.

In order to evaluate these two regimes we shocked the US economy by
increasing the spread between borrowing and lending rates, as
happens in a financial crisis (see Barrell, Davis and Kirby in this
Review). Both the wedges between borrowing and lending rates for
consumers and for firms were raised by 300 basis points. We may
encompass the two feedback rules in (I) with int being the
intervention rate, ssr being the steady state (endogenous) real
interest rate, (1) og being the output gap, inf and inft being the
inflation rate and the target, and P and PT being the price level
and the target.

[Int.sub.t] = a(0) + a(1) * [ssr.sub.t ] + a(2) * [og.sub.t] + a(3)
* ([inf.sub.t+1] - inft) + a(4) * ([P.sub.t] - [PT.sub.t]) (1)

In a Taylor rule a(0) is zero, a(I) is 1.0, a(2) is 0.5, a(3) is
1.5 and a(4) is zero, whilst in a PLT regime a(I) is zero, a(2) is
also zero, and we set a(3) to 0.7 and a(4) to 0.4. The PLT rule has
the advantage of working only on variables that are potentially
observable.

The more aggressive monetary response under PLT causes the exchange
rate to jump down relative to TR, offseting the initial deflation,
as we can see from figure AI. The rule also requires that monetary
policy is expansionary after the recession is over in order to take
the price level back up to target, and although inflation initially
falls, it is above target thereafter for a period until prices are
back on target. The differences in interest rates and the exchange
rate, as well as in expectations in the labour market, mean that
demand does not drop so rapidly, and the output cycle is much more
damped with PLT than TR.

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DOI: 10.1177/0027950110389766

Table 1. Forecast summary Percentage change

 Real GDP(a)

 World OECD China EU-27 Euro USA Japan Germany
 Area

2007 5.2 2.7 13.2 3.0 2.9 1.9 2.3 2.8
2008 3.0 0.3 9.3 0.5 0.3 0.0 -1.2 0.7
2009 -0.6 -3.4 8.9 -4.2 -4.0 -2.6 -5.2 -4.7
2010 4.9 2.8 10.7 1.8 1.8 2.8 3.2 3.4
2011 4.5 2.6 9.4 2.1 2.1 2.8 2.0 2.8
2012 4.3 2.5 8.7 2.0 1.8 2.7 1.5 1.7
2001-06 3.9 2.3 9.3 2.0 1.8 2.4 1.4 1.1
2013-17 3.8 2.5 7.5 2.1 1.9 2.7 1.5 1.8

 Real GDP(a) World
 trade(b)
 France Italy UK Canada

2007 2.3 1.4 2.7 2.2 7.3
2008 0.1 -1.3 -0.1 0.5 2.8
2009 -2.5 -5.1 -5.0 -2.5 -11.0
2010 1.9 1.1 1.6 3.0 13.5
2011 1.9 1.5 1.6 3.0 10.3
2012 1.6 1.7 2.0 3.0 5.8
2001-06 1.8 1.1 2.5 2.6 6.7
2013-17 1.9 1.6 2.5 2.7 5.2

 Private consumption deflator

 OECD Euro USA Japan Germany France Italy
 Area

2007 2.2 2.3 2.7 -0.6 1.8 2.0 2.3
2008 2.9 2.7 3.3 0.4 1.7 2.9 3.2
2009 0.3 -0.3 0.2 -2.2 0.1 -0.6 -0.2
2010 1.7 1.4 1.8 -1.5 1.4 1.1 1.5
2011 1.8 1.6 2.0 0.0 1.4 1.6 1.4
2012 2.0 1.7 2.2 0.8 1.4 1.6 1.9
2001-06 1.9 2.1 2.3 -0.9 1.4 1.7 2.6
2013-17 1.9 1.8 2.0 1.3 1.5 1.4 2.2

 Private
 consumption
 deflator Interest rates (c) Oil
 ($ per
 UK Canada USA Japan Euro barrel)
 Area (d)

2007 2.9 1.6 5.1 0.5 3.8 70.5
2008 3.1 1.6 2.1 0.5 3.9 95.7
2009 1.2 0.5 0.3 0.1 1.3 61.8
2010 4.6 1.4 0.3 0.1 1 75.7
2011 3.3 2.1 0.5 0.1 1.4 79.0
2012 1.5 2.1 0.9 0.2 1.9 86.1
2001-06 2.0 1.7 2.7 0.2 2.8 37.8
2013-17 2.1 2.1 2.3 0.6 3.3 99.4

Notes: Forecast produced using the NiGEM model. (a) GDP growth at
market prices. Regional aggregates are based on PPP shares. (b)
Trade in goods and services. (c) Central bank intervention rate,
period average. (d) Average of Dubai and Brent spot prices.