Although the pace of the global economic recovery following the 2007–09 recession beat many analysts' expectations, the uneven growth between developing and advanced economies adds a layer of uncertainty to the outlook for 2011. In the fourth-quarter issue of EconSouth, Atlanta Fed economic analyst Andrew Flowers explored the factors contributing to the uneven recovery and the complications it poses for global economic policymaking.
One important reason emerging economies are growing faster than are advanced economies is because the financial crisis that triggered the global recession started in the advanced economies, explained Flowers. "These hard-hit Western countries are now particularly burdened with weakened financial systems that were most exposed to the now-soured securities that precipitated the freezing of credit markets and failure, or near-failure, of several systemically important institutions."
Developed economies, for their part, are still working off the debt overhang following the financial crisis. Indeed, the European debt crisis in spring 2010, which stemmed from investor concerns over Greece's deficit and the government's ability to meets its debt obligations, played an important role in altering the global outlook during the year, wrote Flowers. With the help of an unprecedented rescue package from the European Union and support from the International Monetary Fund, the crisis has abated, but "the threat of overly indebted advanced economies lacking the ability to fulfill their debt obligations remains a significant if unlikely threat to the global economic recovery."
In addition to creating uncertainty about the global economic outlook, the uneven recovery also poses challenges for economic policymaking, noted Flowers. While many advanced countries are having problems growing their economies, some emerging economies are battling overvalued currencies from an inflow of foreign investments. The complex currency issues facing the global economy can be boiled down to two issues—China's artificially undervalued currency and the excessive appreciation of the currencies of some emerging economies. First, China's undervalued currency, the renminbi, makes China's exports cheaper and imports into China more expensive. Consequently, U.S. exports to the rapidly growing country, a major source of potential economic growth, are stifled.
Meanwhile, the excessive appreciation of many emerging countries' currencies is affecting the exports from those countries. "While competitive devaluation has not been sufficiently widespread to earn the currency-war label, tensions remain evident in nations seeing their currencies appreciate strongly," said Flowers. Some countries—Brazil, for example—have implemented capital controls to help stem the flood of foreign investments that are causing their currencies to appreciate.
To learn more about the global recovery and the outlook for 2011, read "Uncertainty Lies Ahead for the World Economy"—in print or online—in the fourth-quarter issue of EconSouth.