Economics Weekly - Recession cannot disguise ongoing shift in global economy; Weekly economic data preview - Data to show inflation falling markedly
Economics Weekly - 15
disguise ongoing shift in global economy
Whilst the focus in
global financial markets is, rightly, on when the recession will end, and on
speculating on whether the proliferating
signs of economic recovery are sustainable or not, there is another less observable
trend that has not been changed by the recession: this is the higher share of
global economic output taken by the emerging markets. Chart a highlights this
trend. We have calculated the share of world economic output accounted for by
the top ten developed economies (ranked according to their share of gdp) over
the last 28 years and compared that group with the top ten emerging economies,
also ranked by gdp. The results are clear: the share of the developed economies
has fallen sharply, whilst the share of the emerging economies has, not
surprisingly, risen equally sharply.
Looking at chart a, it
can be seen that the output shares were pretty stable in the early 1980s but
from about 1988 onwards the shares shifted at an accelerating pace in favour of
the emerging country top ten (E10). These shifts will increasingly have
implications for trade flows, for wealth creation, for the demand for raw
materials and hence for commodity prices and trends, the future direction of
financial markets and for a range of global institutions. It also clearly has
implications for inflation, current account positions and fiscal trends. It is
the latter that we look at more closely in the following analysis.
Faster growth in the
emerging economies has driven up their share of global gdpâ€¦
The rising share of
global gdp accounted for by the top ten emerging economies is not down to
slowing growth in the developed economies but to much faster growth in the
emerging economies themselves. Chart b illustrates how rapid the rate of growth
of the top ten emerging economies has been in the last decade and also how stable
it has been at a high rate. Although emerging market growth has slowed markedly
as the world economy has entered recession, it is also clear that, as a group,
the top ten emerging market economies have avoided recession, though only
because of China and India. Chart b highlights the
fact that the top ten developed economies (G10) also had a stable growth rate
in the last decade but that on average their annual average economic growth was
some 4 to 5 times slower than in the developing economies. It is this that
explains the outperformance of the emerging economies in taking a rising share
of total global gdp.
â€¦but an improving trend
shows up in other areas of economic performance as well
Table 1 compares the
trend of the last 10, 5 and 2 years, in terms of gdp, inflation, current
account and fiscal balances for the G10 and the E10. It highlights the better
performance of the emerging top ten economies. In terms of gdp, the average
annual growth average rate has been 2.3% for the G10 and 8.2% for the E10; in
the last 5 years it been 2.2% for the G10 and 10.1% for the E10; in the last 2
years (to 2008) the average was 1.5% for the G10 but 10.3% for the E10. What
about this year and next? The consensus forecast is that G10 gdp falls by 2.8%
in 2009 and expands by 1.6% in 2010. For the E10, economic growth rises by 1.4% this year and accelerates
to 5.6% in 2010. This means that there has been hardly any change in the trend observed in chart a and
in table 1: the E10 share of global gdp continues to rise sharply, hardly
slowed by the global recession.
But there are some other
economic features of the relative performance of the G10 and E10 economies
over the last 10 years
worth focusing on as well. One is that inflation has fallen globally, driven by
the decline of inflation in the emerging market economies and its stability in
the G10, see chart c. Price inflation averaged 8.2% in the E10 over the ten
years to 2008, but this slowed to 5.4% in the last five years, with a modest
acceleration to 6.3% in the last 2 years. For the G10, price inflation was
remarkably stable at between 2% to 2.6% in the last 10, 5 and 2 years. Strong
and stable economic growth and inflation were accompanied by a persistent trade
deficit amongst the G10 and a growing but stable trade surplus for the E10, see
chart d. Was this position ever sustainable?
Probably not, as it
implies that the G10 accumulated an internal financial deficit, as shown by
chart e. To some extent, the recession has helped to reduce global trade
imbalances as it has reduced the surplus of the E10 exporters and reduced the
deficits of the G10 importers. But the problem is that it has been done at the expense
of a worsening fiscal deficit in the G10. As chart e shows, the fiscal deficit
of the G10 countries will, on average be around 8% in 2010, more than double
its 2007 position.
What does this mean for
Fast growth has led to a
steady improvement in the finances of the emerging economies, with the last 2 years
seeing a net positive position. This was of course related to rising exports
and to increasing foreign currency reserves, so accumulating a net saving or
creditor position with the rest of the world. Although both the G10 and the E10
will be in fiscal deficit over the next two years, the position of the E10 is
clearly much better than that of the G10. This in itself is a remarkable fact
of the last decade, that despite recession, the internal and external balances
are better in the emerging market economies, as a group, than in the G10. This
is just one reason why the trends analysed in this Weekly should interest all
observers. There is a big pool of savings and capital sitting in the E10 area.
Their fast growth and stable prices should mean a big and expanding market for
goods from G10 economies but it also means a shift in the relationships between
the G10 and the E10 in a number of other areas. From global banking trends and
savings flows, to trading in commodities and the price of energy and the flow
of capital and investment. These trends, therefore, have huge future
implications for financial markets. This is why, despite the recession, we
should not lose sight of what is happening in the global economy.
The sharp fall in energy
prices since last year will be reflected in a marked improvement in inflation data
in the UK, US and euro zone this
week. Although crude oil prices have surged above $70 recently, they still
remain well below last yearâ€™s heady levels. We forecast the UK headline consumer price
measure eased below the 2% official target in May for the first time since
September 2007, while its US counterpart dropped
further into negative territory. The risk of inflation undershooting its
official target in the medium-term will have remained the focus at the Bank of Englandâ€™s interest rate meeting
earlier this month, the minutes of which are published on Wednesday. We expect
to hear that the decision to maintain Bank rate at 0.5% and to keep the APF at
Â£125bn was unanimous. The latest UK labour market, retail
sales and public finances data are also published this week. In the US, the ongoing travails of
the housing market will be evident from the latest housing starts and building
permits data for May. US industrial production data, also due on Tuesday, are
expected to show further broad weakness. However, confirmation of a sharp
improvement in the US current account deficit
in the first quarter of 2009 could provide a fillip for the dollar. It is a
quiet week for euro zone data, headed by the German ZEW survey and EU-16 CPI
for May on Tuesday. No changes to interest rates are expected at central bank
meetings in Japan, Switzerland and Norway this week.
ô€‚„ UK inflation data for May, due tomorrow, are expected to show
year-on-year CPI inflation declined for the third consecutive month, to 1.9%,
from 2.3% in April. Falling housing costs, reflecting the sharp drop in energy
prices, and rising slack in the economy are likely to lead to further sharp
falls in the remainder of the year, potentially briefly leading to outright
falls on an annual basis. The annual retail price measure of inflation, which
turned negative in March for the first time since records began in 1948, is
forecast to show a further decline to -1.5% in May from -1.2% in April. The
Bank of Englandâ€™s latest inflation forecast, as detailed in its May Inflation
Report, showed CPI inflation at below the 2% target at the end of the two-year
forecast horizon based on Bank rate remaining constant at 0.5% and Â£125bn of
asset purchases. The minutes of the June MPC meeting, due on Wednesday, may therefore
dampen speculation of a potential rise in interest rates early next year, while
the prospect of further asset purchases could be enhanced depending on how the
committee assess the recent sharp rise in gilt yields and the more positive
economic data of late. However, risks to the outlook will also be highlighted
by official data this week. UK unemployment data, also
due on Wednesday, will show another substantial rise in the jobless total as
the recession continues to bite. The claimant count measure of unemployment is
expected to exceed Aprilâ€™s rise of 57,100, with an increase of 70,000 in May.
The ILO unemployment rate is forecast to rise from 7.1% to 7.4% in the three
months to April, the highest since July 1997. Rising unemployment will keep downward
pressure on earnings growth, with a further drop in headline average earnings
growth possible and continuing subdued underlying earnings growth likely in
April. The negative implications of rising unemployment for consumer spending
and the public finances are likely to be reflected in data for retail sales and
public sector net borrowing on Thursday. We forecast the volume of retail sales
declined by 0.3% in the year to May, from a rise of 2.6% to April, while public
sector net borrowing was Â£15.5bn in May, up from Â£12.2bn last year. Preliminary
UK M4 money supply data, also due on Thursday, are likely to show that the
impact of Q/E remains modest so far.
ô€‚„ In the US this week, further signs that the recession is abating
should be provided by the latest initial jobless claims and housing market
data. However, although modest improvements are expected, it should be
remembered that prevailing levels are still well below those associated with
recovery. US industrial production,
due tomorrow, is forecast to show a further decline of 0.8% in May, equivalent
to 13% lower on the year. Solid rises in the headline indices of producer and
consumer prices in May may not prevent further declines in their respective
annual rates, with annual CPI inflation forecast to fall to -0.9%, from -0.7%
in April. The dollar could find support this week from confirmation that the US current account deficit
narrowed to below $100bn for the first time since Q4 2001, while net purchases
of US long-term securities rose to $60bn in April. Bernanke and Geithner head
the list of speakers
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