World Economic Outlook: Inflation Spike a Concern

Global economic growth will slow in 2011, with developing countries such as India and China providing the lion's share of the expansion. The World Bank estimates global GDP growth at 3.3 percent in 2011, against 3.9 percent in 2010, with emerging markets growing by 6 percent.

Economists believe the world is set for a triple-speed recovery this year; developing countries growing by more than 6 percent, the US by 3 percent, and the euro area by less than 2 percent. It appears most of the world, with a few exceptions, is suffering from the effects of high inflation. If international prices continue to rise, affordability issues and poverty could intensify.

The rising food prices in emerging nations are a worry, and economists are concerned that any further supply shocks could push prices even higher, triggering a food crisis like the one the world witnessed in 2008, when higher food costs led to violent unrest across the developing world. The price of Brent crude oil has hit $105 a barrel for the first time since October 2008 on concerns that the political unrest in the Middle East could result in disruption of oil supplies.

Here are additional analyses of major countries and regions:

The US budget deficit will hit $1.48 trillion this year. This almost equals the 10 percent of GDP overspend recorded by Washington in 2009 at the depth of the last recession. Growth is expected to be 3.1 percent in 2011 and 2.8 percent in 2012. These rates are slow compared with previous post-recession recoveries. The lack of stronger economic growth suggests the Federal Reserve Bank will complete its second $600 billion program of quantitative easing, which began in November and will finish in June. It has not been ruled out if more will follow.

Growth in household spending did pick up late in 2010 but has been constrained by high unemployment, which hovers around 10 percent and is not expected to return to a more normal 5.3 percent until 2016.

Inflation continues to be a concern within the euro zone, as rising fuel prices helped push annual inflation up to 2.2 percent in December, above the European Central Bank midterm target of just below 2 percent. Consumer prices in countries using the euro climbed 0.6 percent on a monthly basis. German inflation accelerated in January to its highest rate in over two years (a major contributory factor for euro zone inflation). Estonia has the highest inflation rate at 5.4 percent, followed by Greece at 5.2 percent, while Slovakia has the lowest rate at just 1.2 percent.

Euro zone unemployment remained at 10 percent in December, where it has been at or above for the past seven months. However, Irish unemployment fell last year, and German unemployment fell further than expected in January to 7.4 percent from 7.5 percent in December. Despite economic indicators pointing to a slowing in Germany’s economic recovery, that economy is set to expand by 2.3 percent this year, helped by strong manufacturing orders raising German business confidence. While falling unemployment should help boost German consumer spending, there are concerns that firms may face a shortage of skilled labor.

Japan's rising debt continues to be a problem: Its gross national state debt will soon rise above 200 percent of GDP. Some experts warn that Japan could end up like Greece unless it tackles this issue. In order to get the debt crisis under control Prime Minister Naoto Kan has drawn Kaoru Yosano, a veteran opposition politician, into the cabinet to help build cross-party agreement on fiscal reform. Yosano has said he aims to draw up a plan for funding rapidly rising social security costs, which could be the basis for cross-party discussion in June. Many politicians from both the ruling Democratic Party and opposition groups share Yosano’s conviction that a substantial increase in the consumption tax will be an essential part of returning to fiscal stability.

China’s GDP grew faster than expected in 2010, at a rate of 10.3 percent despite Beijing's repeated attempts to tap the brakes. The news fuels concerns that the authorities will resort to tougher methods in their struggle to contain inflation, and this could stall the world’s main engine of growth. Inflation eased to 4.6 percent in December from a 28-month high of 5.1 percent the month before, as food price pressures waned. Inflation for 2010, as a whole, was 3.3 percent. China’s leaders have made curbing inflation a high priority in light of the unrest experienced during past periods of high inflation. Following the release of this inflation data short-term market interest rates shot up almost 2 percent, while share prices on the Shanghai stock exchange fell 3 percent.

So far, despite rising inflation, the People’s Bank of China has shied away from raising interest rates because of the pain it would cause to lenders. Instead it's relied mainly on raising bank reserve requirements in order to curb the volume of lending. January saw the yuan strengthen against the dollar, although this may have been politically motivated to coincide with President Hu Jintao’s visit to the US.

Industrial output rose strongly in 2010, suggesting there is growing demand again for Chinese-made goods. Retail sales also rose by 14.8 percent during the year. In order for the economy to rebalance, economists say consumption will need to grow much more quickly than the overall growth level for many years.

Some of the best-performing Asian markets have started the New Year with a disconcerting, inflation-inspired selloff. Stocks in emerging markets from India and across Southeast Asia are now worried that interest rates will have to increase to fight inflation. Foreign investors have poured billions of dollars into these markets in recent months hoping to capitalize on the stronger economic growth there, compared to the US, Europe, and Japan.

There are now signs that foreign money is beginning to retreat. South Korea recently raised interest rates from 2.5 percent to 2.75 percent in an attempt to cool rising prices as the country’s economic recovery strengthens. A number of other Asian economies, including Thailand, have also raised interest rates in recent weeks to control rising inflation.

Following the floods in Australia, Brisbane faces a massive, costly rebuilding task after thousands of homes in the third largest city were swamped, adding to the mounting cost of the deluge across Queensland. Costs are estimated to be in the region of 15 billion Australian dollars.

5 comments on “World Economic Outlook: Inflation Spike a Concern

  1. SunitaT
    March 9, 2011

       2011 is going to be tough, inflation is going to be the the biggest concern to most of the countries. Major cause for this inflation will be the rising prices of Crude oil. Continued unrest in arab region is not only affecting development of the arab region but the whole world. I guess its high time international community should take some concrete step against dictatorship ruled countries like Libya and Egypt and thus help ease the inflation.

  2. stochastic excursion
    March 11, 2011

    A rise in commodity prices due to scarcity is not a sign of inflation.  It's only inflation when the scarcity is caused by an influx of currency to the economy due to its devaluation and average wage increase.  Inflation is something that can be fixed by policy; scarcity nobody can do much about except cut back.

  3. Kunmi
    March 20, 2011

    The trend of events in the arab world is going to compound the economic instability of many countries. The EU and the Westerners will not fold their arms seeing the human rights being denied. There is no doubt, these events will cause a set back to supply chains across the world. I think the supply chain can begin to explore the virgin countries to expand the business. 

  4. Ashu001
    March 21, 2011


    You are quite accurate about what you mention here.

    Here are some more charts to help explain what you are talking about –

    Central Banks(who control the amount of Money in Global Economies),have way too much control and power over our Lives today.Its upto the people themselves to wrest control over the proceedings & this can only be done by beating the Central Bankers at their own game.Basically moving as much of our Savings out of the Official Banking system as possible.

    How? Put our Paper Money savings in Gold,Silver,Oil and Agricultural Assets.



  5. stochastic excursion
    March 21, 2011

    There is always a background of inflation, as Pulitzer-prize winning economist Milton Friedman explained, the dollar is put into circulation by the Federal Reserve which gets notes from the Treasury on interest.  Friedman, a supply-sider with a libertarian streak, argued against this systemic hard-wired inflation introduced by the interest accrued in this transaction.  The mainstream, though, seems to feel that a modicum of inflation is desirable because it encourages investment as people avoid having the value of their savings erode.  Too much inflation obviously causes erosion even of growth investments.

    Easy credit tends to cause a temporary kind of inflation, but the chickens usually come home to roost when the payments are due.  Still, US monetary policy has been to raise interest rates to counter inflation and this is why I take issue with the mistaken perception of inflation.

    Agreed the system isn't perfect and @tech4people isn't alone in the demand for currency reform.  All the same I think it's worth pointing out that deepening economic difficulties have their roots in Depression-era (1930's) class struggle, when the Roosevelt administration declared a greatly reduced gold-to-dollar ratio.  This was in response to a hoarding of currency-basis metals by those who had the means.  The dollar was moved completely off gold by Nixon, probably due at least in part by the cost of Viet Nam.  Graham and other early advocates of the World Bank had proposed a multi-commodity currency basis that would be more resilient in the face of hoarding, and this is something @tech4people seems to be on to.

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