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The global economy ushers in new phase of recovery, but vigilance is required

Justin Yifu Lin's picture
Photo: © World Bank

Two years after the crisis triggered by the collapse of Lehman Brothers, the world economy has entered a new phase of recovery. Most developing countries have recovered to pre-crisis (or close to pre-crisis) levels of activity and have transitioned from a bounce-back phase to more mature growth.

We estimate in our new online Global Economic Prospects 2011 report that the growth rate for the world economy was 3.9% in 2010 and is likely to be to 3.3% this year, then 3.6 % in 2012.

The GDP growth rate for developing countries was a robust 7 percent in 2010, up sharply from 2% growth in 2009. This year we project the developing world will record GDP growth of 6%, then edge to an estimated 6.1% in 2012. This far outstrips the high income countries, which grew by 2.8% in 2010 and are estimated to growth by 2.4% this year and 2.7% next year.

Developing countries’ domestic demand is playing a major role in the rebound, representing 46% of global growth in 2010.

So truly, we are in a new multipolar growth world.

But not everything is rosy - especially for high-income countries and some countries in the Europe and Central Asia Region.

High unemployment remains the main challenge. 

Monetary policy, fiscal stimulus programs, and growth have not been able to put people back to work yet, reflecting two forces at play. First, substantial excess capacity in inflated sectors built up in the boom period before the crisis like housing  and manufacturing. Second, there is a pressing need for these countries to restructure their economies by increasing household savings, strengthening bank regulations, and consolidating fiscal positions. 

Although the expected growth rate for developing countries is quite robust, the fallout from the crisis is not over yet, and from what we see, there are three main risks we need to watch over:

• the financial market situation in parts of the Euro Area
• large capital flows rushing into nine middle income countries as investors seek higher yields (given low interest rates in many high-income countries)
• food, commodity and fuel prices, which, if they jump higher could hurt the poor

These three risks, even though relatively unlikely, could derail or slow the global recovery.

For the long-term, sustainable global recovery and future growth are contingent on three factors. First, governments need to conclude financial reforms and improve regulations so as to avoid a similar crisis in the future. Second, fiscal stimulus policies need to be more sustainable and targeted. Third – and most importantly – growth needs to be promoted by shifting focus from demand management to supply side stimulus. 

Successfully tackling these challenges will result in increased productivity, more jobs and higher government revenue while reducing the risk from non-performing loans in the banking sector.

Comments

Very efficient and precise synopsis of the current situation and possible implications. It would be nice to see how all these factors play into the forex markets and overall economy.

Submitted by Zoe Horn on
While there is good news for some, the picture is very mixed for many of the world's poorest workers. The about to be released study from the Inclusive Cities project, "Coping with Crises: Lingering Recession, Rising Inflation, and the Informal Workforce", which interviewed informal workers in 14 cities in Africa, Asia and Latin America, found that persistent unemployment and underemployment in the formal economy continues to drive new entrants into informal employment. While incomes have risen modestly for some, they have not risen to pre-crisis levels and have not kept pace with inflation. Households continue to restrict their diets, while the withdrawal of children from schools appears to be on the rise. The report argues for a new stance on informality that places informal workers at the centre of employment schemes and social protection measures, and includes them in economic policies and urban planning. Without an inclusive approach to economic and social policy that integrates informal workers, recovery will not reach many of the world's most vulnerable.

I wanted to thank you for this great read!! I definitely enjoyed every little bit of it, I have you bookmarked to check out all the new stuff you post.