Emerging economies have staged a remarkable recovery and despite a slowdown, growth is expected to remain solid in 2011 and 2012, according to Dexia.
“Strong demand from these countries has driven commodity prices higher, in particular for agricultural products. Given the weight of food in emerging economies’ consumer basket, this increase has fuelled inflation.
In the medium term however, inflation in these countries will be contained as agricultural prices level off and emerging currencies will tend to appreciate,” Dexia Asset Management in its latest economic and financial outlook, said.
“Despite some bumps in the road, the economy is clearly recovering. Exports in particular should benefit from global growth and a weaker dollar, while the resurgence of domestic demand should induce companies to keep investing,” Anton Brender, Chief Economist at Dexia Asset Management said.
“Residential investment should ultimately rally but from levels which are very depressed. Downward pressure on real-estate prices is likely to continue however as long as access to mortgages remains difficult. Household deleveraging is expected to continue with a savings rate now remaining stable. Consumer spending should thus progress in line with income.”
“Having benefitted initially from lower social contribution payments, income should now be underpinned by a recovery in employment. Unfortunately, the rise in fuel prices has slowed down progress in real income. In 2012, assuming moderate budgetary tightening, growth should remain moderate, around 2.5%. In this context, the unemployment rate will decline very modestly and the Federal Reserve will remain accommodative, whilst closely monitoring inflationary expectations.”
Eurozone economic performances were very uneven in 2010, partly on account of differences in budgetary policies. However, for the area on average, the recovery seems close to be self-sustained. Economic activity is still being driven by exports and productive investments continue to recover. The expected improvement in the labour market and slower inflation in 2012 should ultimately enable consumer spending to accelerate moderately. In 2011 growth should be close to 2% despite ongoing budget tightening. With growth returning to normal and inflationary expectations drifting higher, the ECB will continue to raise its policy rates, but cautiously in order to prevent the euro from getting to strong.
The sovereign debt crisis is far from over. Spain has managed to decouple its risk premium from other “peripheral” countries over the past few months. However, maintaining sufficient growth remains a key to regaining market confidence. Greece is currently in a highly unfavourable position on this score, hence the rumours of imminent debt restructuring.
“Such a restructuring, especially if outstanding debt is written-off, would be very risky: Portugal and Ireland would rapidly follow and the market would then set its sights directly on Spain,” Florence Pisani, Economist at Dexia AM, said.