Worldwide: Recent World Economy Dynamics

The global economic recovery remained highly uneven in 2010. Growth in the emerging market economies (EMEs) of Asia and Latin America has exceeded our Spring outlook while the pace of activity in advanced economies, especially in the second half of 2010, has fallen short of what we expected in the spring.

U.S. output growth decelerated markedly to below its trend rate by the middle of the year. Over the first three quarters, housing investment continued to plummet, consumption growth was held back by very rapid household deleveraging, and net imports of goods and services widened considerably. While a definite upturn started in the Euro area in the spring, turmoil in sovereign debt markets prompted stringent fiscal retrenchment measures and a sharp widening of sovereign credit spreads that is holding back growth in many E.U. countries.

Excess capacity has remained substantial in advanced economies, holding down consumer price inflation below implicit or explicit targets. Monetary authorities in the United States, Japan, the Euro zone, and Britain have kept their policy interest rate close to zero. In addition, the Fed has just initiated a second round of quantitative easing (QE2). On the other hand, to stem risks of inflation down the road, central banks in countries that have benefitted from sound financial sectors and robust terms of trade (Canada, Australia, Sweden, Norway and New Zealand) have gradually increased their policy interest rates, although to levels that remain low.

Rapid global growth in investment in inventories and machinery and equipment supported a strong expansion of domestic demand and exports by EMEs as well as firm commodity prices. The emergence of inflationary pressures and the risk of an asset price bubble from large capital inflows and rapid credit growth prompted a general tightening of monetary and prudential policies. Some EMEs have also intervened heavily in foreign exchange markets and implemented or intensified capital controls in order to prevent an appreciation of their currency.

The Global Outlook: 2011-2012

The recovery in advanced economies is expected to remain timid by historical standards given the depth of the recent recession, although such sluggishness is consistent with previous episodes of financial crisis. Indeed, important headwinds to the recovery arise from adjustment to excessive debt associated with the crisis. This includes deleveraging by households, which will keep personal saving rates relatively high to bring debt more in line with income and assets over several years. In Canada, a high and rising ratio of household debt to household income entails the risk of an abrupt spending retrenchment in the event of an adverse shock to wealth or income.

The outlook through 2012 for house prices and residential/commercial construction is bleak as real estate markets in many countries continue to adjust to past excesses. This will further hold back private demand through adverse effects on asset values, employment and bank balance sheets. In Canada, housing investment is expected to decline in 2011.

At the same time the withdrawal of fiscal stimulus and consolidation of public finances announced by many governments will cut the contribution of public demand to growth. The fiscal stance in advanced economies will shift from a discretionary loosening in the first half of 2010 to a discretionary tightening of one percent or more of GDP in 2011. In Canada, slower government spending on goods (including fixed investment) and services will have a negative impact on growth of about one percentage point in 2011 and nearly half a point in 2012; discretionary changes in coming budgets would add to this fiscal drag.

With inventories now more in line with expected sales, inventory investment should become a neutral factor rather than a stimulant in the short term. While corporate investment in infrastructure will be moderate, investment in machinery and equipment is expected to maintain much of its recent strong momentum in many countries, including Canada. It remains to be seen when firms are going to follow up with increased hiring. Small and medium-sized firms, which account for most new jobs, indeed face credit restrictions that hamper new investment and hiring in many countries.

Emerging market economies in Asia and Latin America should continue to experience robust, if slightly slower, growth in the short term, buttressed by fast potential output growth, absence of financial excesses, relatively healthy fiscal positions, and strong final domestic demand. The better growth prospects and higher yields they offer relative to advanced countries will induce further considerable capital inflows. These inflows will add to pressures from current account surpluses for real exchange rate appreciation, either through nominal currency appreciation where exchange markets are flexible or higher price and wage inflation where they are not. In any event, further tightening of monetary and prudential policies combined with fiscal consolidation (already underway) and capital controls are to be expected as many EMEs struggle to contain CPI inflation and asset price bubbles.

The U.S. dollar prices of most industrial commodities, notably metals, are expected to increase only modestly in the short term as global commodity demand growth moderates somewhat in response slowing inventory accumulation and as spare capacity in commodity production remains significant. Because of crop failures, low stocks and export restrictions, grain prices have recently surged and are expected to be high, if not to rise further, in the short term. Futures markets currently foresee oil prices remaining around their 2010 peaks and natural gas prices barely progressing from their present depressed levels. One upside risk is that a marked depreciation of the U.S. dollar and/or rise in inflation expectations in conjunction with QE2 push commodity prices significantly higher.

Monetary policy in the advanced economies is expected to remain highly accommodative in view of the rather sluggish growth in these economies, which should keep inflation low. The Fed has pledged to keep interest rates low for an "extended period" and will buy an additional $600 billion of Treasuries through June (QE2) in an attempt to lower longer-term interest rates, prevent deflation and boost asset prices. A collateral depreciation of the U.S. dollar would also stimulate activity. Barring a sharp rise in inflation expectations, interest rates, both short and long, should remain low through at least 2011 not only in the United States but across most advanced economies.

Short-Term Prospects for Output Growth (%)








3 (3.5)*

2.3 (3.0)


United States


2.7 (3.0)

2.3 (3.0)




10.3 (8.7)

9.0 (8.0)




4.7 (4.2)

3.8 (4.0)


*Figures in brackets are from the Bennett Jones Spring 2010 Economic Outlook.

Sources of Concern

The global recovery may be reasonably entrenched but the current situation is not without raising concerns for the future. First, in many advanced countries there is little financial or political room for additional fiscal stimulus in the event of a negative surprise on growth. The United States is a case in point.

Second, natural offsets to the upcoming fiscal tightening may turn out to be smaller than in the past. Not only is there little room for conventional monetary policy to provide counter-acting stimulus, given already very low policy rates, but the future effectiveness of QE2 is somewhat uncertain. In addition, the synchronization of consolidation across countries makes it more difficult for each one of them to rely on exports as offset to fiscal drag and may in fact intensify resistance to currency appreciation in order to maintain competitiveness.

Third, global imbalances will remain substantial and may well grow in the short term, increasing political tensions and the risk of new protectionist measures. Three factors are at the root of this problem: (1) several EME currencies, primarily that of China, remain undervalued relative to the U.S. dollar; (2) countries with large current account surpluses (especially Germany, Japan and China) are not generating sufficient domestic demand; and (3) there is extremely slow restructuring to encourage rotation of demand (toward exports in deficit countries and toward domestically-produced services and imported goods in surplus countries).

Fourth, the rate of growth of potential output slowed in many advanced countries in the wake of the crisis. This reduction in potential primarily reflects a fall in investment during the crisis and an increase in on-going long-term unemployment that is partly related to the necessary restructuring of major industries. This lower potential would restrain actual output growth once excess capacity is eliminated in 2013 and worsen ongoing fiscal positions of governments.

Finally, financial systems are still somewhat vulnerable to downside shocks. In Europe, markets continue to focus on the risk of sovereign debt default, unfavorable growth prospects, and the vulnerability of the banking system. In the United States, regional banks are highly exposed to weak real estate markets. Hot money flows continue to create instability in financial markets in many EMEs.

Implications for Canadian Business

The relatively anemic growth prospects for the next two years in Europe, North America and Japan imply that consumer-oriented businesses will struggle to maintain prices and margins. On the other hand, strong growth in EMEs implies strong demand for commodities and firm or rising margins for many commodity producers. With elevated unemployment persisting in North America through 2012, general labour availability should be good, although certain skills and professions will remain in high demand with rising wages and salaries. With subdued inflation over the next two years, central banks will maintain low policy interest rates in North America and Europe. Credit availability for small and mid-sized businesses is likely to improve a little more in 2011; corporations will continue to face very receptive bond markets in 2011. Generally, somewhat higher rates should be anticipated by the end of 2012. Elevated week-to-week volatility in financial and foreign exchange markets is likely to persist over the next two years, implying that businesses will need to pursue careful hedging and risk management strategies.

In recent years productivity growth in the Canadian business sector has not only slowed but lagged far behind that in the United States. At the same time, the Canadian dollar has appreciated against the greenback. Thus, overall, Canadian business has lost competitiveness and must now innovate and invest. A strong Canadian dollar, low interest rates, and favourable credit conditions in 2011-2012 provide an opportunity to invest in machinery, equipment and technology at relatively low cost.

Needed Global Policy Adjustments

A number of policies need to be pursued to buttress confidence, promote growth and reduce volatility going into the medium term. First, countries with large fiscal deficits must launch credible medium-term fiscal consolidation plans to stabilize and then reduce their debt/GDP ratio.

Second, a marked appreciation of the renminbi against the U.S. dollar in real terms is a key tool for rebalancing global demand. The least costly way is through China allowing a significant nominal appreciation of the renminbi against the U.S. dollar and making the renminbi convertible. A more costly and protracted way would be through higher Chinese price and cost inflation, which China has allowed to a limited degree. The most costly way of all would be through a deflation of price and costs in the United States, which U.S. policymakers will resist at all costs.

Third, structural reforms are imperative. EMEs need to reduce distorsions that lead to excessive saving rates and deter investment in the non-tradables sector. Many Asian EMEs need to increase the share of national income accruing to labour. Advanced economies need to implement structural reforms to raise potential output growth. This is urgent especially in light of the persistent negative impact of population aging. Labour market, product market and fiscal reforms are needed to encourage more labour force participation, reduce structural unemployment and stimulate productivity.

Finally, more progress in mending and reforming financial systems is important because weak banks and uncertainty over upcoming regulation hamper credit supply. This has three aspects: (1) resolving and/or restructuring weaker financial institutions through closure, recapitalization or merger; (2) clarifying and specifying regulatory reforms for banks and other large financial institutions and (3) improving the oversight of financial markets to foster increased transparency, stability and efficiency.

Implications for Canadian Governments

It is the responsibility of the federal government to continue to promote changes in international, financial and trade systems, changes that will enhance global financial stability and Canadian firms' access to global markets. Continued efforts at the IMF, BIS and WTO are essential. At home, structural and regulatory policy changes to facilitate greater competition and higher productivity growth are essential. Equally important is that both the federal and provincial governments begin to take action on credible plans to restore fiscal balance in the medium term.

Canadian governments face a period of slow revenue growth and significant fiscal retrenchment in the years ahead. General government services to the public will be reduced, some fees and taxes (e.g. Employment Insurance premiums) will be increased and considerable labour strife in the public and para-public sectors can be expected. The problems are most acute at the provincial level as these governments struggle to provide health care services to an aging population.

Were current trends to continue, total health care spending (public and private) is projected to rise from roughly 12 percent of GDP today to about 18 percent by the end of the 2020s. If governments continue to finance roughly 70 percent of health care spending, public spending on health care would rise from about 8½ percent of GDP today to 12½ percent by 2030 as a result of the expansion of the scope and quality of health care services, population aging and rising relative prices of health care services. Even if we in Canada are incredibly successful in improving the efficiency and effectiveness of health care delivery, total spending on health care will rise by 3¼ percentage points of GDP to 15¼ percent.

Absent any offloading of public expenditure onto individuals or employers, the public spending will increase by 2¼ percent of GDP even if the delivery system is brilliantly managed. Thus provinces face the unenviable choices of raising additional revenue, further slashing expenditures on other services, or offloading responsibility for financing to employers and individuals. For a complete analysis of the health care spending problem see "Chronic Health Care Spending Disease: A Macro Diagnosis and Prognosis" by David A. Dodge and Richard Dion, C.D. Howe Institute.

International Trade Issues and Negotiations

In a news release issued December 1,1 the WTO Secretariat maintains its September projection that world merchandise trade will grow by 13.5 percent in volume terms in 2010. The rate of growth slowed in the third quarter reflecting lower economic growth. This exceptionally large increase in trade needs to be seen against the backdrop of the 12.2 percent fall in world trade in 2009. This very high growth is not expected to continue into 2011. In value terms the WTO has calculated that world trade expanded by 23 percent in the first nine months of 2010. However, the value of world trade still remains below the peak reached before the financial crisis.

In November at the G20 meeting in Seoul, leaders strongly reaffirmed their commitment to resist all forms of protectionism; they also reiterated their commitment made at the Toronto G20 to extend their standstill undertaking until the end of 2013. Despite this there are disturbing signs that protectionist pressures are on the increase fed by unsustainable global imbalances, persistent high unemployment and uneven economic recovery, particularly in developed countries. WTO Director-General Pascal Lamy has noted in his somber annual, "Overview of Developments in the Trading Environment,"2 that new restrictive measures introduced in the period between November 2009 and mid-October 2010 cover around 1.2 percent of world imports, an increase over the level of one percent recorded in the previous 12-month period. More worryingly, he draws attention to the "danger of a steady accumulation over time of measures that restrict or distort trade and investment".

On a more positive note, both the Seoul G20 summit and the subsequent APEC leaders meeting in Yokohama offered strong support to conclude the long stalled Doha Round of trade negotiations during the course of 2011, which leaders identified as "a critical window of opportunity, albeit narrow". Any agreement will require a meeting of minds among the G5 countries, the US, the EU, China, India and Brazil. These efforts, now underway in Geneva, will test whether, in the aftermath of the midterm elections in the United States, there will be greater American willingness to engage in serious trade liberalizing efforts. The G20 commitment to "seek ratification, where necessary, in our respective systems" is relevant in this regard and is the first time the G20 has addressed the issue of the willingness of leaders to take up the challenge of fighting for the domestic ratification of a WTO deal.

In Canada, the government continues to push forward with an active program of trade negotiations. In November, Canada and India initiated free trade negotiations in pursuit of a comprehensive economic partnership agreement. Negotiators continue to register progress in the Comprehensive Economic and Trade Agreement negotiations between Canada and the EU. Canadian negotiators also continue with efforts to join the TransPacific Partnership negotiations, although Canada's high import duties in the dairy and poultry sectors, and the government's reluctance to negotiate them, have so far frustrated achieving this objective.


1. For a more detailed presentation see the WTO's December 1, 2010, press release, "Trade value growth slows in the third quarter of 2010" which can be found on the WTO website at:

2. The full report can be found on the WTO website at:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions