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News Release

PIIE Forecasts Continued Solid Global Economic Growth Despite Recent Turmoil

April 4, 2011

The turmoil in North Africa and the Middle East, the upsurge in world oil and commodity prices, and the disastrous earthquake and tsunami in Japan will slow global economic growth for at least the first half of 2011 and increase downside risks after that, according to Michael Mussa, senior fellow at the Peterson Institute for International Economics. At the same time, Dr. Mussa projects that world real GDP growth on a year-over-year basis will be a solid 4.3 percent this year and 4.5 percent next year. The projections were a highlight of the nineteenth semi-annual Global Economic Prospects program at the Peterson Institute, during a luncheon on April 4.

The new projections by Dr. Mussa, former Chief Economist at the International Monetary Fund, are roughly in line with his forecast of last September (of 4.3 percent and 4.4 percent this year and next respectively). The reason that the forecast has stayed the same, despite the negative impact of the latest events, is that as of mid-February, the global economy had been on a path toward exceeding Dr. Mussa's earlier forecast. That earlier hopeful trend has now been derailed because of the recent developments.

An overall global recovery has been powered by a much stronger performance by emerging market and developing economies than by the advanced economies, a pattern expected to persist at least through this year and next, Dr. Mussa says. Inflation is clearly rising on a worldwide basis, led by surging food and energy costs. Besides inflation, and rising food and energy costs, Dr. Mussa has found that other downside risks to the economy are posed by sovereign debt problems in Western Europe and the possibility of a sudden United States shift from fiscal expansion to fiscal consolidation. Real GDP growth for the US economy in 2010 is now estimated at 2.9 percent, in line with his forecast last September. His forecast is for US real GDP growth of 3.3 percent in 2011 and 3.2 percent in 2012, and for US unemployment to fall to 7.5 percent by the end of next year.

The Global Economics Prospects forum also featured presentations on the Middle East, Japan, and China. Senior Fellow Marcus Noland, Deputy Director of the Peterson Institute, said that in the Middle East, prospects for growth could be impeded not simply by the political instability of the region, but also by basic underlying weaknesses and a longstanding failure to undertake economic reforms. Among the weaknesses of the region, he has found, are the lowest employment rate in the world, a youth unemployment rate twice the world average, and the troubling fact that unemployment is worse among those who have attained the most education. In Japan, Dr. Noland notes that the Tokyo government's preliminary estimate of damage recovery costs are more than $300 billion over three years, or about 5 percent of current GDP. He concludes that it was heartening, however, that Japan might be able to divert resources from wasteful infrastructure projects to rebuild Sendai and surrounding areas, and in the process produce a more efficient overall economy. Obvious downside risks are posed by a possible continuing failure to contain the crisis at the Fukushima nuclear facility or by the possibility of continued earthquake aftershocks.

Nicholas Lardy, Anthony M. Solomon Senior Fellow at the Institute, concludes that China has come through the global financial crisis and downturn of 2008-09 in better shape than most countries. It achieved 9.2 percent and 10.3 percent growth in 2009 and 2010 respectively. Despite a wide variety of concerns expressed about the possibility of inflation, excessive bank lending and the withdrawal of government stimulus spending, Dr. Lardy sees no slowdown in China's growth as a direct result of these factors. China could thus easily continue its record of double-digit growth this year and next. He finds that growth was more strongly than ever driven by private, market-oriented economic activity rather than state-driven, non-market oriented activity, and that China has made progress in rebalancing the sources of its economic growth. Dr. Lardy says, however, that the slow recoveries in the US and Europe show that China can no longer rely on exports as an engine of growth. Infrastructure building at the 2009 pace is not sustainable, and property investment will need to moderate further.

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About the Peterson Institute for International Economics

The Peter G. Peterson Institute for International Economics is a private, nonprofit, nonpartisan research institution devoted to the study of international economic policy. Since 1981 the Institute has provided timely and objective analysis of, and concrete solutions to, a wide range of international economic problems. It is one of the very few economics think tanks that are widely regarded as “nonpartisan” by the press and “neutral” by the US Congress, its research staff is cited by the quality media more than that of any other such institution. Support is provided by a wide range of charitable foundations, private corporations and individual donors, and from earnings on the Institute's publications and capital fund. It moved into its award-winning new building in 2001, and celebrated its 25th anniversary in 2006 and adopted its new name at that time, having previously been the Institute for International Economics.