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News Release

Peterson Institute Forecasts Slower Growth This Year but Possibly Better Prospects in 2012

September 9, 2011

WASHINGTON—The economic slowdown in the United States, Europe and Japan, partially offset by more hopeful prospects among emerging market and developing countries, lead to an estimate of growth for the world economy at 3.8 percent this year according to Michael Mussa, senior fellow at the Peterson Institute for International Economics and former chief economist of the International Monetary Fund. Dr. Mussa remains "optimistic but not exuberant" about growth prospects in 2012 and projects global growth at 4.2 percent.

These projections were the focus of the twentieth semiannual Global Economic Prospects program at the Peterson Institute on September 9. Simon Johnson and Carmen Reinhart, senior fellows at the Institute, also made presentations at the program. Dr. Reinhart reviewed the dangers of the mounting debt burden in the United States and other countries and Dr. Johnson said that Europe's efforts to address its sovereign debt crisis appeared to be falling short.

The key question for the global economy, said Dr. Mussa, was whether growth will be sustained in 2012 or whether a more significant slowdown is likely. Part of that answer lies with the developing world, which dropped from 7 percent growth in 2010 to slightly below 6 percent this year. Dr. Mussa believes these countries will sustain 6 percent growth next year, assuming that the advanced economies do not again fall into recession. The modestly slower growth in these countries, he said, results from a normal slowdown, after an initial burst following the crisis of 2008–09, and tighter policies to curb inflation in some countries.

The main shadow over the global picture comes from the advanced economies, which face many challenges: Core inflation has been on an uptrend for the United States but is somewhat erratic for Europe and significantly negative in Japan. While growth in the advanced economies will probably fall below 2 percent this year, Dr. Mussa projected a modest acceleration next year but only to a rate of 2.6 percent.

Western Europe has been plagued by the fiscal and financial problems of Spain and Italy as well as Greece, Ireland and Portugal. Increasing worries about fiscal sustainability have spilled over to concerns about the viability of European banks. Dr. Mussa credited European policy makers with efforts to deal with the problem but added that further steps will be needed. If they are carried out, Europe will "not likely fall back into recession."

For the United States, Dr. Mussa said real GDP growth has fallen well below his earlier forecast. For 2012, he projected year-over-year growth of 2.8 percent. Under current circumstances, an excessive focus on fiscal consolidation next year could turn an already disappointing recovery into something worse. The new proposals outlined by President Obama to boost US employment would help by eliminating this fiscal drag and perhaps even converting it into a modest stimulus.

Dr. Reinhart discussed the challenges to the global economy posed by the massive overhang of public and private debt in wealthier countries, particularly the United States and Europe. Emerging markets, at the same time, face concerns raised by their large capital inflows and consequent inflationary pressures along with risk of asset bubbles and overheating. Based on the historic record of downturns following a financial crisis, Dr. Reinhart said that the "big issue for years to come" is the likelihood of a return to "financial repression." Such a phenomenon would consist of widespread debt restructurings as already being discussed in Europe. Such restructurings are in effect, a tax on bondholders and savers. She added that there was "no easy way out" of the current crisis and that, if the past is any guide, unemployment is likely to remain high in advanced economies for some years.

In an analysis of the situation in Europe, Simon Johnson found that recent developments have not been encouraging. In his presentation, an update of his Policy Brief of last July entitled "Europe on the Brink," coauthored with Peter Boone, Johnson said, that in the best case scenario, austerity will prevail across the heart of the euro area for the foreseeable future. The generally accepted strategy of trying to prevent a Greek debt restructuring from adversely affecting the financial stability of the rest of the region is unlikely to work. If efforts to avoid contagion prove unsuccessful, the debate will shift to the European Central Bank with a growing likelihood that it will have to continue buying Italian and Spanish bonds without regard to amount or face a devastating financial crisis that would wipe out the capital of all major European banks. Johnson thinks the bond buying approach will succeed but expects inflation and depreciation to follow.

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About the Peterson Institute

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.