Prospects for 2010 Global Economy and Financial Markets

The real economy is recovering as well, 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 1.2 percent in 2009 to 5.2 pereent in 2010 and to 5.8 percent in 2011.

global economy,economic recovery

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.