Advanced Economies Remain Sluggish


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The IMF released their world economic outlook on Friday, June 17th.  Even though it shows that the global economy is projected for 4.3% growth in 2011 and 4.5% growth in 2012, advanced economies will continue to drag down global economic activity for the foreseeable future.

Their analysis segments economic performance by advanced, emerging, and developing countries.  This grouping is based on various levels of economic development.  Countries that are emerging or developing still have a large portion of economic development devoted to agriculture and their economies are less urbanized.  Advanced economies will have diverse sources of economic development that involve high levels of human capital, complex manufacturing processes, and effective use of technology.

The list of the primary advanced economies, along with their projected growth rates for 2011, follows below:

  1. Germany:  3.2%
  2. Canada:  2.9%
  3. United States:  2.5%
  4. France:  2.1%
  5. Italy:  1.0%
  6. Spain:  0.8%
  7. Japan:  -0.7%
  8. United Kingdom:  1.5%

One consistent thread contributing to the subdued projections is the fiscal imbalance present in all of the advanced countries.  Certainly, the U.S. has its issues, but they are not alone.  In fact, the U.S. percentage of public debt to GDP is actually below the aggregate average of all advanced economies.  It should be noted that public debt includes federal, state, and local debt obligations.  Here is a list of the same countries from above and their projected 2011 public debt as a percentage of GDP:

  1. Japan:  233.2%
  2. Italy:  120.6%
  3. United States:  98.3%
  4. Germany:  87.9%
  5. France:  84.8%
  6. United Kingdom:  82.9%
  7. Canada:  82.7%
  8. Spain:  67.5%

Countries, such as Western Europe and Canada, have made the most progress in deficit reduction by focusing on a combination of spending cuts and increased revenue sources.  While most of the budget deficit problems reside in Southern Europe, these debt obligations affect the whole European Union because they all rely on one currency, the Euro.  This interconnectedness also involves finance with many European financial institutions having loans in Greece, Portugal, and Spain, where most of the problems are.

The uncertainty aligned with whether these countries will ultimately pay off their debts in a timely manner hamstrings financial institutions.  While it appears that Greece has received a reprieve from default, their demise could set off a domino effect that would severely affect the liquidity of European financial institutions.  Liquidity is needed in order to continue lending to businesses and consumers.  Angst over this situation is affecting their overall outlook for even the strongest country in Europe, Germany, whose economic growth is expected to rise at a much slower pace (2%) in 2012.

As for the U.S. public debt, it is expected to spike even more later in the decade. If Congress is unable to raise the debt ceiling, then that could lead to a technical default and would compromise the U.S. top credit rating.  While it is important that tough decisions are made regarding taxes and spending, one must recognize that a stringent austerity package will threaten our already meek recovery.

If we are to see better performance from advanced economies, then they will need to impose better fiscal discipline.  The problem is that the political risks are high and any solution will be painful, as we have seen with riots occurring in Greece.

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