GLOBAL ECONOMIC OUTLOOK FOR 2010

Last year the financial markets were strained during 2009. In the advanced economies, market conditions were very difficult until forceful policy actions were implemented to restructure the financial sector, resolving the uncertainty about losses, and break the adverse feedback loop with the slowing real economy. In emerging economies, financing conditions were likely remained acute for some time—especially for corporate sectors that have very high rollover requirements.

In 2010 the global economy is expected to make a slow recovery, expanding at a predicted rate of 3 percent, while employment and credit will remain strained. Furthermore, there are many downside risks and adverse scenarios that could materialize, such as an untimely unwinding of fiscal and monetary policies in rich nations.

The acute phase of the financial crisis has passed and a global economic recovery is under way. Moreover, the recovery is fragile and expected to slow in the second half of 2010 as the growth impact of fiscal and monetary measures wane and the current inventory cycle runs its course. Indeed, industrial production growth is already slowing (albeit from very high rates). As a result, employment growth will remain weak and unemployment is expected to remain high for many years. The overall strength of the recovery and its du­rability will depend on the extent to which household- and business-sector demand strengthens over the next few quarters. While the baseline scenario projects that global growth will firm to 2.7 percent in 2010 and 3.2 percent in 2011 after a 2.2 percent de­cline in 2009, neither a double-dip scenario, where growth slows appreciably in 2011, or a strengthening recovery can be ruled out.

Financial markets have stabilized and are recovering, but remain weak. Interbank li­quidity as measured by the difference between the interest rates commercial banks charge one another and what they have to pay to central bankers have declined from an .unprecedented peak of 366 basis points in dollar markets to less than 15 basis points—a level close to its "normal" pre-crisis range. Currencies, which fell worldwide against the U.S. dollar in the immediate aftermath of the crisis, have largely recovered their pre-crisis levels. And interna­tional capital flows to developing countries have recovered—with a rapid run-up during the last months of 2009. Also, borrowing costs for emerging market borrowers have stabilized over the last few quarters, but remain elevated.

However, private sector firms remain shut out from international banking. markets. Moreover, the Dubai World event and ripple effects to credit downgrades for Greece and Mexico can be expected to raise concerns about sovereign debt sustamability and. will impact risk assessments, capital flows, and financial markets in 2010.

The real economy is recovering as well. Although global industrial production in October 2009 remained 5 percent below its level a year earlier, it is recovering, with out­put in both high-income and developing countries expanding at more than a 12 percent annualized rate (or scar) in the third quarter of 2009. Just as a sharp drop in inventories contributed to a precipitous initial decline in industrial production, the stabilization of inventory levels has contributed to a strong re­bound in production, and this factor is ex­pected to support industrial production, even as growth rates start to come down.

Trade too is recovering but remains de­pressed: Quarterly growth rates have moved into positive territory in recent months, but the U.S. dollar value of trade was still off 17 percent from its September 2009 level. Lower commodity prices mean that the vol­ume of trade has fared better, but it is never­theless down by 3 percent from a year ago.

Much of that stimulus has found its way into imported raw commodities and invest­ment goods. Indeed, partly because of restock­ing, Chinese demand for key metals has been supportive of commodity prices, which have recovered about one-third of their earlier de- dines. Nevertheless, international metal prices, measured in U.S. dollars, are 20 percent below their July 2008 levels, oil prices are 44 percent lower, and food prices 24 percent lower, with global oil demand some 2 percent lower than its peak level of 87 million barrels a day in 2007.

The combination of the abrupt fall in com­modity prices and ample spare capacity world­wide has resulted in median inflation in developing countries falling from more than 10 percent in August 2008 to about 1.0 percent in October 2009.
Global imbalances narrowed further during the crisis. This trend may be largely cyclical, as it relates to substantial declines in the U.S. trade deficit, the Chinese trade surplus, and the price of oil. The durability of the narrowing will de­pend on the speed with which the United States can unwind its fiscal and monetary stimulus and the extent to which stimulus-based infra­structure investment in China contributes to higher domestic demand rather than additional export capacity.

Although the real-side effects of the crisis have been large and serious, economic activity in most developing countries is recovering and overall growth is expected to pick up from the anemic performance of 1.2 percent in 2009 to 5.2 percent in 2010 and to 5.8 percent in 2011. Although much lower than the 6.9 percent growth rate that developing countries averaged between 2003 and 2008, these rates are well above the 3.3 percent average performance during the 1990s. Excluding China and India, the remaining developingcountries are projected to grow at a 3.3 and 4.0 percent rate in 2010 and 2011, respec­tively, compared with 5.4 percent growth on average between 2003 and 2008. Countries in developing Europe and Central Asia have been hardest hit by the crisis and are expected to have the least marked recovery, with GDP ex­panding by only 2.7 percent in 2010 and by 3.6 percent in 2011.

The combination of the steep decline in ac­tivity in 2009 and the relatively weak projected recovery means that developing economies will still be operating about 3 percent below their level of potential output —and unem­ployment, although on the decline will still be a serious problem. Moreover, the impacts on poverty and human suffering in these coun­tries will be very real. Some 30,000-50,000 additional children may have died of malnu­trition in 2009 because of the crisis (UNSCN 2009; Friedman and Schady 2009), and by the end of 2010, 90 million more people are ex­pected to be living in poverty than would have been the case without the crisis.

Few of the poorest countries will have the fiscal space to respond to the economic dislo­cation caused by the crisis without significant additional financial assistance. It is estimated that IDA countries (those eligible for soft loans and grants from the International Devel­opment Association of the World Bank) will require an additional $35 billion to $50 bil­lion in funding just to maintain current levels of programming, let alone come up with the additional funding required to meet the needs of those additional individuals thrown into poverty. Worse, the recession may cause donor firms to reduce aid flows precisely at the moment the flows need to rise.

Great uncertainty continues to surround future prospects. Even the weak recovery out­lined above is not certain. If the private sector continues to save in order to restore balance sheets, a double-dip, characterized by a further slowing of growth in 2011 is entirely possible—especially as the growth impact of fiscal stimulus wanes. A stron­ger recovery is also possible, if the massive traditional and untraditional monetary stimu­lus that has been put into place in high-income countries begins to gain traction.

LATIN AMERICAN

Latin America will recover in 2010, but its expansion will likely be below its potential. Given aggressive foreign and domestic policy responses in Latin American countries, the region is stabilizing in the second half of 2009 after having contracted severely in the first half of the year. Although global and regional economic and financial conditions will likely improve in 2010,we expect the pace of external and local demand revival to be measured. Commodity prices will stay on hold in the middle ground between record highs and recent lows, mainly because of below-potential recovery in the U.S. and advanced economies, as well as in China. Though global liquidity will remain elevated in the upcoming quarters, favoring Latin American asset classes, market anxiety about the timing of exit strategies around the world represents a significant risk. Miscalculations in exit strategies and disappointing economic results pose the main risks to Latin American market dynamics in 2010.

Bibliography
*International Economic Outlook,Omar Gómez Castañeda,March 19,2009
*International Outlook for 2010,Elham Mafi-Kreft,Clinical Assistant Professor of
Business Economics an Public Policy,Kelley School of Business,Indiana
University Bloomington,November 2009
*Prospects for the Global Economy 2010-World Bank
*Latin American Outlook,Nouriel Roubini,Forbes

===========================================================
AUTHOR

Dr Omar Gómez C,Senior,Ph.D.Post-Doctorate in Management of the Organizations from URBE,Maracaibo,Estado Zulia,Venezuela.Ph.D in Business Administration in Business Management from University of Aberdeen,South Dakota,United States.Ph.D in Political Economy from Thomas Alva Edison College,United States.Economist from Universitatis Sancti Pauli Sigilium,Geneva,Switzerland.
===========================================================