The debt woes of the Euro Zone economies and the need for political, fiscal and monetary policy compromises to keep the economic union intact have underlined the disparate recoveries of the world’s developed and emerging economies. The advanced economies, dominated by the United States, Western Europe and Japan, are projected to grow at a slow but sustained pace over the next year. Developing Asia, including China and India, is projected to lead global growth. Overall, global growth is expected to be stronger than originally projected.
Still, the nascent recoveries in both developed and emerging economies remain tenuous, and the potential for missteps in the unwinding of stimulus programs to derail a normalization of global activity are very real.
In the advanced economies, the recovery has depended inordinately on support from the public purse. Interventions have taken many forms, including direct government spending, easier monetary policy and more creative forms of support for liquidity. As credit constraints have eased, the importance of the latter programs has diminished somewhat. In the United States, the Federal Open Market Committee has cited evidence of sustained improvements in economic activity, strengthening of financial markets and a decrease in job losses in explaining the sunset timetable of its myriad liquidity interventions and last month’s increase in the discount rate. Purchases of agency mortgage-backed securities and agency debt are set to conclude in the first quarter, as are various lending and credit facilities. The Term Asset-Backed Securities Loan Facility’s support for new commercial mortgage securitization activity is expected to run through midyear.
The winding down of support for credit markets parallels the relative stabilization of the banking sector-but it also reflects public and political fatigue with government interventions. Germany’s response to Greece’s behind-the-scenes requests for aid is a case in point. It is widely accepted that the absence of a framework for managing cross-border financial and economic challenges has constrained European integration. Absent aid from its Euro partners, Greece has been forced to undertake difficult domestic austerity measures. Last week, the International Monetary Fund stated that it “welcome[s] the substantial fiscal measures announced by the Greek authorities. … We also encourage the authorities to develop and implement soon significant reforms to boost productivity and growth, complementing the fiscal consolidation that is now underway.”
But these measures have prompted popular discontent to a degree that has been destabilizing to normal business activity. A backlash that erodes Western governments’ capacities to enact stabilizing and growth-oriented policies is a significant risk to the global growth outlook. In a New Year’s policy address, International Monetary Fund managing director Dominique Strauss-Kahn warned that a premature withdrawal of stimulus would increase the likelihood of a double-dip recession, with the most developed economies at the leading edge of another contraction. In its January update to the World Economic Outlook, the I.M.F. asserts that “a premature and incoherent exit from supportive policies may undermine global growth and its rebalancing.”
n contrast with modest expectations for the advanced economies-where risks from the convergence of stimulative policies and political realities are among the most salient issues -many of the world’s emerging economies have already returned to robust growth. The I.M.F. projects that across emerging and developing nations, growth will accelerate to 6 percent in 2010, up from 2 percent in 2009. This compares favorably with a growth forecast of 2 percent in the developed economies, where the I.M.F. cites balance-sheet restructuring-by households, businesses, lenders and governments-among the binding constraint to its baseline projections.
The headline projections for the emerging and developing economies conceal tremendous variation in the extent of recovery from the downturn. The nations of Central and Eastern Europe, in particular, are expected to lag behind broader trends. China and India, on the other hand, are projected to lead global growth over the next year, expanding by 10 percent and 7.7 percent, respectively. In both cases, these projections reflect significant upward revisions from projections made a year ago.
More so than at anytime in modern history, current growth trends in China and India are now buoyed by an emerging middle class and a resulting uptick in domestic consumption activity. These are positive trends that portend a meaningful improvement in quality of life for millions of people. At the same time, the maturing of the Chinese and Indian economies presents a new set of risks to be managed. In China, in particular, domestic investment in the residential property sector has inflated asset prices. The Economist raised the issue for its audience in October 2009: “Has the world got a new bubble economy? A rising chorus of foam-spotters believes so.”
As was the case in the United States before the credit crisis, inflows of capital are now a source of asset-price buoyancy in parts of Asia. In a December policy address, Norman Chan, chief executive of the Hong Kong Monetary Authority, characterized the issue as follows: “Many people in Hong Kong have become concerned about the emergence of an asset-price bubble. As we all know, interest rates are now very low due to the extremely loose monetary policies around the world. Attracted by a promising outlook for economic recovery, large amounts of funds have flowed into Asia, including Hong Kong.”
In response to concerns about rampant property development, many Chinese lenders are tightening credit. The Industrial and Commercial Bank of China, the largest lender in the country, announced a series of tightening measures last month. Similarly, China Construction Bank has indicated that it has reduced its lending target for 2010. An abrupt correction in China’s asset markets has the potential to strike at household wealth and confidence in ways that China’s policy makers are as yet unaccustomed to addressing. American dependence on Chinese support of our debt markets means that this should be a serious concern on both sides of the Pacific.
Sam Chandan, Ph.D., is global chief economist and executive vice president of Real Capital Analytics and an adjunct professor of real estate at Wharton.