Fiscal Policy Exhaustion and Sovereign Risk Slow Down Global Recovery

Global Assessment and Outlook Two of the sixteen members of the Euro Area - the European Union's bloc using the euro as its common currency - have been rescued. Greece received a bailout of 110 billion euros and Ireland's bailout hit 85 billion euros. Financial pressures from debt burdens and rising borrowing costs for several larger economies of the Euro Area have not yet reached their peak. It is expected that in 2011 Portugal and Spain will have large amounts of funding to roll over, in addition to immense incremental net borrowing requirements. The contagion fears seem to hit other large economies evidenced by elevated Italian bond spreads over German bonds. For 2011, it is estimated that Portugal and Spain will have funding requirements in excess of 250 billion euros and Italy's needs will be close to 340 billion euros. Financial and sovereign debt problems in larger countries, like Spain and Italy, are not only far costlier to solve but they also have larger spillover effects on the banking institutions of other economies and, most importantly, on global growth by weakening international trade. Given a worldwide exhaustion with fiscal policy by both the public and governments - they now see deficit-driven stimuli and ballooning debts as the problem rather than the solution - fiscal consolidation is expected to dominate economic policy over the next two years. Consequently, austerity programs on bailed-out countries will adversely affect their growth, jobs, incomes, and their imports. The larger the bailed-out country, the larger its adverse effect upon its major trading partner. For instance, Ireland is the fifth largest purchaser of United Kingdom's exports and Spaniards buy a lot of goods made in Germany, France, and Italy. At the same time, the Euro Area is the most important trading partner of the United States outside North America. The ongoing European financial and sovereign risk crises, coupled with increased uncertainty from the loss of confidence in economic policy and newly emerged fears of geopolitical factors related to the Korean Peninsula have resulted in further trimming of our baseline economic forecast for Europe and subsequently spillover effects upon the rest of the world. In 201 1, Euro Area is now forecast to grow by 1.4% and worldwide output to expand by 3.8%, about 1% lower than an estimated growth rate of 4.7% for 2010. II. Short-Term Indicators and Forecasts The baseline forecast incorporates major findings of the World Economic Survey conducted by the German lfo Institute and the Paris-based International Chamber of Commerce. In the results of the survey, which was conducted in the fourth quarter of 2010, about 1,100 executives from 113 countries indicated that although the world's economic climate continued to improve in the fourth quarter of 2010, the pace of growth has slowed for a second quarter in a row. The recent overall readings of the worldwide survey are consistent with a continuation of the global recovery but at a slower pace than in 2009 and in the first half of 2010. The major findings of the fourth quarter's survey are as follows. * Worldwide, executives evaluated the economic situation of the fourth quarter of 2010, favorably with overall business conditions at satisfactory levels. They found economic activity in their countries to bea lotbetterthan in the fourth quarter of 2009. Most important, regarding the future, executives expect economic conditions in the first half of 2011 to be better than those that prevailed in the last quarter of 2010. * On a regional basis, North American executives assessed the currenteconomic situation to be still at unsatisfactory levels but significantly better than a year ago. Looking forward, business experts from the United States and Canada expect economic conditions to improve in the next six months compared to the fourth quarter of 2010. In Asia, executives appraised the current economic situation as above satisfactory levels and at substantially higher performance levels than a year ago; they were not equally confident about the future, expecting economic activity in the next six months to be about the same as in the fourth quarter of 201 0. …

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