Global Economic Outlook 3nd Quarter 2011

In recent months, the major areas of uncertainty for the global economy have revolved around the crisis in the Eurozone, the future path of monetary and fiscal policy in the United States, and the fight against inflation in emerging markets. As such, our report this quarter offers some thoughts on these topics.

Deloitte We begin with Elisabeth Denison on the future of the euro. She offers a brief history of the development of the Eurozone, the causes of the current crisis, and the various options available to policymakers as they struggle to resolve the current problem and prevent future ones from occurring. The bottom line, according to Elisabeth, is that no solution will be enduring unless it includes fundamental reforms in the countries that have faced problems.

We then turn to the mix of policy in the United States, with specific focus on what the Federal Reserve might do now that the second round of quantitative easing has ended. Pralhad Burli and Siddharth Ramalingam offer a brief explanation of the mechanics and impact of quantitative easing (QE), a discussion of the first two rounds of QE, and a point of view on whether and when another round might be necessary. They also discuss alternatives to QE that might have the effect of boosting liquidity and adding to credit growth.

Our final topical article concerns the issue of how best to measure economic well-being. Satish Raghavendran and Neha Jain discuss whether or not GDP is an adequate measure of a country’s economic output. After all, there are countries with seemingly high levels of per capita GDP yet with high levels of environmental degradation and poor measures of public health. They discuss the various problems with GDP and offer alternative measures. They conclude that, despite the problems with GDP, the best alternatives still leave much to be desired.

We then move to our outlooks for various countries and regions. In his quarterly point of view on the U.S. economy, Carl Steidtmann looks at the recent slowdown in U.S. economic activity. He examines the debate over whether the United States is headed for a double-dip or simply a soft landing. After examining the data, Carl concludes that the case for growth is “more compelling.”

Next, I offer my view on the outlook for China. I discuss how, in the short term, China’s authorities continue to struggle with restraining inflationary growth while maintaining export competitiveness. I then turn to some of the longer term obstacles to rapid growth, specifically the problem of over-investment. I suggest that the transition to a more normal economy is fraught with dangers and could lead to a substantial decline in growth.

Elisabeth Denison then returns with her quarterly outlook for the Eurozone economy. She suggests that Europe faces a “rather worrying combination of ingredients.” These include a two-track recovery in which the north and south grow at very different rates, a tightening of monetary policy by the central bank, tighter fiscal policy everywhere and slower growth in key export markets. She concludes that the outlook is for moderate growth at best.

Ian Stewart then provides his analysis of the outlook for the UK economy. He believes that the recent poor performance is not, as many analysts suggest, solely due to tighter fiscal policy. He says that another important explanation is the surprisingly high level of inflation and its impact on the real spending power of consumers. He offers hope that, if the inflationary environment changes, the UK economic performance could improve.

Next, I offer my view on the Japanese economy. I discuss how the earthquake and tsunami have rendered an even worse economic decline than initially expected. However, I offer hope that reconstruction spending will provide a boost to growth in the coming months. In addition, I discuss the impact of various ways of financing reconstruction.

On Brazil, I discuss the two key and intertwined issues of exchange rates and inflation. I analyze the choices faced by Brazil’s authorities. I also discuss some of the longer obstacles to continued rapid economic growth, with special focus on Brazil’s inadequate level of investment.

Next, I offer my view on the outlook for Russia’ economy. I discuss how Russia is fighting high inflation and what impact oil prices might have on Russian economic policy decisions. I also attempt to explain why Russia’s growth rate has not been as strong as that of the other BRIC economies.

Next, Siddharth Ramalingam provides his quarterly view on India. He discusses the monetary and fiscal policy choices faced by the authorities, as well as how the monsoon will affect inflation and policy in the months ahead. He opines that maintaining strong growth while limiting inflation will be a difficult challenge.

Finally, Pralhad Burli offers a point of view on Turkey. He notes that, of late, Turkey’s growth has been spectacular. This has been driven by reforms designed to prepare Turkey for EU entry. Yet, despite the good news, Turkey faces a number of challenges including a burgeoning external deficit and uncomfortably high inflation.

Global Economic Outlook - Q2 2011   (4904.25 KB)
Published 26 April 2011; 60 pages; A Deloitte Research report.

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