Economic growth for 2011 - but with risks
After the slowdown in the second half of 2010, hopes are high that the economic momentum will pick up again in 2011.
Indeed, several factors are going to be growth-supportive: the Federal Reserve’s quantitative easing is gaining some traction; monetary policy remains loose elsewhere; companies remain cash-rich across the globe and after three years of under-investment, obsolete equipment needs to be replaced, at least in developed economies.
2011: Growth outlook
While the US is set to recover towards trend-growth, the economic prospects for most developing countries are likely to remain strong, moving closer to overheating territory – with Japan, Germany and the Nordic countries, as the main beneficiaries, thanks to their strong export base.
Recent signs of a domestic demand recovery in these economies may be seen as a first step towards a more balanced global economy but this has yet to be confirmed. A combination of loose monetary policy, stronger global growth and a first step towards growth rebalancing is expected to be supportive for all risky assets, especially equities and commodities.
… but beware of the risks
However, important tail risks remain for 2011. First, the euro area sovereign crisis is probably not over yet and the risks remain high that, after Greece and Ireland, other member states would need to use the EU/IMF financial assistance mechanism.
With several regional elections in Germany and the general elections due early next year in Ireland, fears of a euro break-up are likely to intensify further. Secondly, rising commodity prices – especially food prices – in an overheating environment is the recipe for a sharp rise in inflationary pressures in the developing countries. Finally, the risk also exists that a deepening of the so-called currency war triggers a wave of protectionist measures.
Yvan Mamalet is an economist at Sarasin & Partners LLP
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