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Dr. Abdul Quader Shaikh U.S. Department of Commerce (January 29, 2010) & Dr. Javier Reyes University of Arkansas Department of Economics Sam M. Walton College of Business (February 5, 2010) International Economic Outlook

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Outline Introduction Economic Outlook: An overall picture Regional Outlook: The specifics What the future holds?

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Introduction The recovery has started, and the challenge is to sustain it. Global Recession Is ending, but a subdued recovery lies ahead. Although financial conditions have improved markedly, it will still take some time for employment to improve significantly.

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Economic Forecast In the advanced economies, unprecedented public intervention has stabilized activity and fostered a return to modest growth in several economies. Emerging and developing economies are currently further ahead on the road to recovery. Rebalancing the Global Economy will take time.

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Beyond 2010 Achieving sustained healthy growth over the medium term will depend critically on addressing the supply disruptions generated by the crisis and rebalancing the global pattern of demand. Consumption in advanced economy is growing slower than in Asia countries.

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Economic Outlook Survey 80 percent of respondents expect the world economy to grow over the next 12 months, compared with a net 69 percent in November. The Global recession Is Ending. Slow Job Growth Ahead but Improving, but still difficult Financial Conditions ahead. A Subdued Recovery and Vulnerability to Mild Deflation. Beyond 2010 Global Economy may Rebalance. Policy Challenges: Reconciling Short- and Medium-Term Objectives.

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Growth Forecast Global GDP to grow 3.9% in 2010. Emerging markets (as a whole) are expected to take the lead. Growth rates expected between 6.0 to 6.3%. Developed economies are expected to recover from recession and grow at an average of 2.1 to 2.7%. The forecast of GDP growth spells good news for equities. Emerging market equities are expected to outperform their counterparts in developed economies. Stocks with exposure to China, India, Malaysia, Indonesia and Korea are expected to offer attractive returns in 2010.

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World 3.9% India 7.7% 2010 Consensus GDP Growth (YoY%) Estimates 10.0 3.6 4.0 2.7% 1.7

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Positive growth is expected in 2010, but the recovery will be a slow one. Source: World Economic Outlook, IMF, January 26, 2010. Dotted lines not in the original figure

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Developed Countries growth is expected to be minimal over the next two years 3.9 4.3 2.1 2.4 2.7 2.6 1.7 2.4 3.6 2.2 1.32.7 1.5 1.4 1.0 1.9 1.7 1.3

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The rapid growth of the mid-2000s in the Emerging Market and Transition Economies is not expected to return 8.4 10 7.7 8.4 9.7 7.8 4.7 5.3 4.7 4.0 3.7 4.7 3.6 3.4 2.0 3.7

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Regional Economic Forecast Latin America and the Caribbean Asia and Pacific countries Africa Middle East &Central Asia EURO

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Latin America and the Caribbean -LAC will recover in tandem with the World Economy, in contrast to previous crises where it lagged the world cycle. But given that the world recovery will be slow, then LAC recovery will take time as well. -Dependent on consumption and employment levels domestically and in developed economies (consumption, travel, remittances, etc.). -But investment seems to be picking up. Source: IMF World Economic Outlook

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Latin America and the Caribbean Latin America has exhibited continuing problems of macroeconomic instability and a much weaker degree of integration into the global economy. Performance of the Brazilian economy, the largest in South America is a success story. For a number of years it has been clear that Brazil, despite substantial natural resource endowments and a talented and entrepreneurial population, has failed to match the growth performance of other emerging market economies, notably those of East and South East Asia.

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Asia and Pacific What is driving the growth? The recovery of international trade flows Given the dramatic drop in trade flows in 2008-2009, and the expected recovery of trade in the coming years, it is possible to argue that the growth in export oriented Asia will continue. The challenges lie in controlling the inflows that could lead to credit cycles, financial instability (vulnerability), negative terms of trade effects, and possibly (but remotely as of today) overheating of these economies. World Trade and Asias Industrial Production Change in Real Effective Exchange Rate (% between 08/2008 and 09/2009) Source: IMF World Economic Outlook

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China China is leading the global recovery, helped by its limited direct exposure to the financial crisis and by a massive stimulus package. GDP growth 8% in 2009 and 10% in 2010, before easing slightly in 2011 as the impact of the fiscal stimulus ends. The strong increase in domestic demand stemming from the stimulus has drawn in imports, while exports have been weak and may not fully recover to pre-crisis rates. There has been much hype about Chinas rapid ascent in the world economy. A number of, medium-, and longer-term potential growth- deceleratorsi.e., economic overheating, widening regional and ruralurban economic divides, banking sector fragility, environmental degradation, rampant corruption, an ageing population etc.that could possibly brake Chinas rapid ascent in the world economy.

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Middle East and Central Asia Region MENAP (oil exporters) Sufficient reserves for governments to respond to the crisis. They will rebuild the reserves with oil revenue as the demand for oil recovers. But their financial systems have been exposed and regulation needs to change. MENAP (oil importers): Softened the blow through the policies of MENA oil exporters and because of their low integration into the world economy. But this will translate in low (relative) growth rates in the near future. CCA countries hit hard, Exporters are doing fine but the rest are suffering and will continue to suffer as remittances drop from Russia.

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Sub- Saharan Africa Challenges: -Debt sustainability. -Strength of Institutions -Dependence on exports of natural resources (could have positive effects for many but it is a curse in disguise for others) Source: IMF World Economic Outlook

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EURO Area -Banks and firms continue the deleveraging of balance sheets and this could slowdown the recovery even further. -Scarcity of credits, high rates of unemployment and labor market rigidities, investment drop, and the lack of global demand, point towards a fragile and slow recovery. -Output gaps and inflation dynamics suggest threats from overheating are not near by. Source: IMF World Economic Outlook Employment over the Business Cycle

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Japan Growth is projected to pick up gradually to around 2% in 2011, due in part to the new governments plan to increase public spending. Unemployment rate is likely to stay around 5 per cent through 2011 and deflation will persist.

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United States? Wait five more minutes.

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Inflation/Deflation in the World?? Source: IMF World Economic Outlook

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Rebalancing Global Demand Achieving sustained healthy growth over the medium term also depends critically on rebalancing the pattern of global demand. Many current account surplus economies that have followed export-led growth strategies will need to rely more on domestic demand. Many external deficit countries will need to rely less on domestic demand and more on external demand. This will require significant structural reforms, many of which are also necessary to boost potential output. Improve corporate governance and financial intermediation, support public investment, and improve social safety nets.

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Conclusions - The World Economy will grow - Asia will lead, other emerging economies will follow, while developed economies will take a bit more time. - Unemployment will remain high worldwide - Inflation dynamics remain interesting to say the least - And now lets take a closer look at the US