The world economy expanded at a faster pace than generally expected last year, growing at an annual pace around 5% in the first three quarters of 2010 before slowing a little in the final months of the year. As a consequence, most forecasters revised up their projections as the year unfolded and the consensus expectation for 2011 has also moved higher – the IMF now expects the global economy to expand by 4.4% this year and by a similar figure in 2012 , according to Bank of Ireland’s latest Bulletin which was published today, 4 February 2011.
Author of the Bulletin, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland said:”The recovery, although stronger than forecast, has been characterised as two-speed, with the developing world, particularly Asia, driving the upturn, and the major developed economies lagging; growth there has been more subdued than in most previous cycles. This pattern is set to continue this year, according to the IMF, although the US is now expected to accelerate – the IMF’s 3% forecast is below the consensus. That pace of growth, if it materialises, should be sufficient to precipitate a fall in US unemployment, still stubbornly high at 9.4%, but not at a pace which will prompt a policy response from the US Federal Reserve. Consequently, the market still expects US interest rates to stay at the current abnormal low level around zero until 2012.
“Growth in the euro area is expected to be more sluggish, at under 2%, and on that basis it is difficult to see the ECB tightening policy, although the ECB is now concerned that inflation is currently above their 2% target. This largely reflects high food and energy prices, a by-product of the global upturn, and so euro rates are unlikely to rise any time soon, although the market is now pricing in a quarter point increase in the final months of the year.
“Inflation is a more pressing concern in the UK where some forecasters expect a 5% CPI reading this month, although in this case the Bank of England believes that the degree of spare capacity is such that inflation will fall back below its 2% target next year. The market is doubtful in that regard and is now priced for two rate increases this year, with the first in the summer months. The UK economy has slowed of late, albeit partially weather related, and this may persuade the Bank of England to sit on its hands for a longer period than the market expects.
“The global upturn has also proved a boon for the Irish economy, with buoyant export sales offsetting weak domestic spending and delivering 1.6% GDP growth over the first nine months of 2010. Indeed, the recent monthly data, showing annual merchandise export growth in excess of 17%, implies that the external sector may have ended the past year with great momentum and that the consensus forecast for Irish exports in 2011 is too low. The strength of the global economy has a flip side, however, in that consumer prices in Ireland and elsewhere will face upward pressure from rising energy and food costs, although in the Irish case offset to some degree by downward pressures stemming from weak domestic spending”, concluded Dr. Dan McLaughlin.
4 February 2011
Dr. Dan McLaughlin Anne Mathews
Group Chief Economist Media Relations Manager
Bank of Ireland Global Markets Group Communications
Tel: 01 609 3221 Bank of Ireland
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