The aura of normalization and stability to which the global economy appeared headed after seemingly reaching the trough of a steep downturn in 2009, has been broken by a troubling string of events and data reports, according to a new report.
In the Manufacturers Alliance/MAPI Global Report, economist Cliff Waldman writes that fears of a public debt default in a number of countries on the southern periphery of the Eurozone created an alarming impression among investors and business executives that a Euro debt contagion and a possible second chapter to the global financial crisis were within the realm of possibility. He credits quick action by European Union (EU) and the International Monetary Fund (IMF) for staving off a double-dip recession and protecting the Eurozone as an economic and political entity.
“Still, the shaky outlook for the largest common market in the world, in tandem with unexpectedly weak data from the U.S., has nonetheless given rise to concerns about the stability and strength of the global recovery even beyond the beleaguered industrialized economies,” Waldman said. “Consequently, the challenge for central banks and governments around the world to guide the renewed global expansion onto stable footing with growth that is rapid enough to have a tangible impact on significant unemployment challenges is still very much at hand.”
The report envisions that near-term global growth prospects will be dominated by a halting and uncertain rebound in advanced economies. This, in turn, is already muting the strength of demand for exports, a critical and often leading component of developing country growth. Gross domestic product (GDP) in non-U.S. industrialized countries, which include Canada, the Eurozone (plus Denmark, the United Kingdom, and Sweden), and Japan, is expected to slow from a compound annual rate of 2.6% during the second quarter of 2010 before reaching a trough of 1.9% during the first half of 2011. Following that, MAPI sees industrialized country growth advancing to 2.2% during the second half of 2011.
Developing countries, as has been the trend in recent decades, will likely outperform their industrialized counterparts. Aggregate developing country GDP is expected to slow from 5% during the second quarter of 2010 to 4.4% by the first quarter of 2011 before accelerating to 4.7% during the second quarter of 2011 and to 5% during the second half of 2011.
MAPI anticipates that the growth rate of total U.S. exports of goods and services will be 12.5% during 2010, a solid improvement over the 9.5% contraction in 2009. As a result of slowing global activity, though, export growth is expected to moderate to 8.1% in 2011.
MAPI also expects the volatility that has plagued currency markets in recent years to continue. Short-term fluctuations in the U.S. dollar will likely result from a confluence of two forces.
First, a rebalancing of trade accounts will reemerge as a dominant theme among currency traders given the clear need of developing economies as well as Japan to strengthen domestic consumption, and for the rich countries to strengthen the contribution of trade to economic growth. Such rebalancing favors a weaker dollar in light of the still outsized U.S. current account deficit.
Second, financial jitters such as those seen recently in the Eurozone are likely to remain for an indeterminate period. Such factors tend to favor a stronger dollar as investors seek the relative safe haven of U.S. fixed income assets.
“As a result, global business and financial leaders will likely have volatile currency markets on their long list of challenges for the foreseeable future,” Waldman predicted.