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Outlook for the international economy


Table 3: International GDP growth forecasts(a)

  2009 2010 2011 2012
Actual Budget June Budget June June
United States -2.4 3 3 2 1/2 2 1/2 2 1/2
Euro Area -4.1 3/4 1 1 1/4 1 1 1/4
Japan -5.2 1 3/4 3 1/4 2 1 1/2 1 1/2
China 8.7 10 10 9 1/2 9 1/2 9 1/2
India 6.7 7 8 1/2 8 1/4 8 8 1/4
Other East Asia (b) -0.3 6 7 1/4 4 3/4 4 3/4 5 1/4
Major Trading Partners 0.0 4 3/4 5 3/4 4 3/4 4 1/2 4 3/4
World -0.6 4 1/4 4 1/2 4 1/4 4 4 1/4

(a) Calculations for World and euro area growth rates use GDP weights based on purchasing power parity (PPP). Calculations for Major Trading Partners and Other East Asia use export trade weights.

(b) Other East Asia is: Korea, Taiwan, Hong Kong, Singapore, Indonesia, Malaysia, Thailand, Vietnam and the Philippines.

Source: National statistical publications, IMF and Treasury.

World outlook and risks

The recovery in the global economy continues, although the outlook is now subject to greater downside risks. Ongoing developments in Europe and the associated financial market volatility pose a major downside risk to the global economy.

Since late last year, market concerns over the ability of Greece and a number of other euro area countries to manage their sizable budget deficits and high levels of public debt have come into sharp focus. While markets were initially concerned whether the most vulnerable euro area governments would receive financial assistance, concerns subsequently shifted to the extent to which euro area growth would be affected by consolidating fiscal finances, the exposure of major European financial institutions to vulnerable countries, and the transmission of problems in Europe to the rest of the world.

The events in Europe have already contributed to higher risk aversion and higher volatility globally, and the improvement in overall financial conditions that had been taking place has reversed somewhat. Notwithstanding these developments, the global growth forecast for this year has been revised up by a ¼ of a percentage point to 4½ per cent. This reflects the stronger than expected performance at the start of the year, particularly in Asia. As a result, the forecast for major trading partner (MTP) growth this year has been revised up by a full percentage point to 5¾ per cent, led by upward revisions in Japan, India and Other East Asia.

The potential for near term growth to exceed expectations was flagged in the Budget, and partial indicators suggest that the global economy continued to grow solidly in the June quarter.

Provided that the current sovereign debt issues in the European periphery remain contained to that region, then the effects of the crisis on global growth are likely to be modest. However, the global growth forecast for 2011 has been downgraded by ¼ of a percentage point to 4 per cent, and there are considerable downside risks for the second half of this year and beyond. Apart from the risk of financial contagion, another large downside risk is the potential for fiscal consolidation across both Europe and the rest of the world to be more damaging to growth than currently forecast.

Relative to the Budget, growth forecasts for both China and the US remain unchanged. China is forecast to growth by 10 per cent this year and 9½ per cent in 2011, while the US is forecast to grow by 3 per cent this year and 2½ per cent in 2011. In China, inflation and overheating loom as the largest risks to the outlook, while in the US, persistent high unemployment will continue to restrain the recovery.