By Gary Feuerberg Epoch Times Staff [PHOTO - Four economists at the Peterson Institute for International Economics (PIIE) are optimistic for global economic growth in 2011 and 2012, and spoke at a luncheon April 4 at PIIE. From left to right are: C. Fred Bergsten, director of PIIE since 1981; Michael Mussa, senior fellow and former chief economist at the IMF; Nicholas Lardy, senior fellow; and Marcus Noland, senior fellow and deputy director of PIIE. (Gary Feuerberg/The Epoch Times)

The world suffered some setbacks in economic activity in recent months, impacting this year’s global growth, but the global economy is still expected to grow by 4.3 percent in 2011, according to an influential economist.

The economic fallout resulting from the earthquake, tsunami, and nuclear crisis in the world’s third largest economy, Japan, has not yet been quantified. Political convulsions in the Middle East and North Africa are disrupting economies in the Middle East and have contributed to an astounding increase in the price of crude oil. A severe earthquake in Australia and heavy flooding in New Zealand are hurting their economies.

Despite such catastrophes and turmoil that are certain to negatively impact regional economic growth, these disruptions will not derail the projected global GDP growth rate of 4.3 percent for 2011, and 4.5 percent for 2012, according to Dr. Michael Mussa, senior fellow at the Peterson Institute for International Economics (PIIE). He recently spoke at PIIE, which hosted its 19th semiannual Global Economic Prospects program last week in Washington, D.C.

Mussa found that “the great global recovery has featured much stronger performance by the emerging market and developing economies than by the advanced economies.”

Mussa has been forecasting national and global economic trends for several decades, serving as chief economist at the International Monetary Fund from 1991 to 2001 before joining PIIE, and was previously a member of President Ronald Reagan’s Council of Economic Advisers.

“The key feature of the global recovery is that we can see a sharp division between the powerful recoveries of developing and emerging economies and an anemic recovery in the advanced economies,” said Mussa.

The “advanced” economies are the United States, Japan, Canada, and nations in Western Europe. These countries will average 2.7 percent growth in real GDP. He projected 3.3 percent growth for the United States in 2011. In most of the advanced economies, particularly in Europe, economic output has not recovered to pre-recession levels.

“Canada is the major industrial country where its real GDP at the end of 2010 was measurably above its pre-recession level,” writes Mussa. The U.S. economy in the last quarter of 2010 finally attained it, while Germany and other G-7 countries “are well below their pre-recession levels of real GDP,” says Mussa.

By contrast, Mussa anticipates 6.1 percent GDP growth for emerging market and developing economies, such as China, India, Brazil, Mexico, and Russia. He sees the emerging market countries on average growing to their fullest potential this year and next, while the advanced economies are making “modest progress,” but not performing to their full potential.

GDP Growth Survey

A brief survey around the world can give some idea of how the leading economies performed in 2010.

Japan was 3.9, which was still 4 percent below its pre-recession level. Because of the calamities this year, Mussa is projecting only 1.0 percent growth for 2011.

Germany in 2010 reached 3.6 percent, and Mussa forecasts 2.9 percent growth this year.

Mussa expects that the Middle East and North Africa region will suffer a sharp slowdown in growth this year, but he is hopeful for a recovery in 2012.

Marcus Nolan, deputy director of PIIE, noted that the Middle East region has the lowest employment rate in the world and is in need of economic reform. Youth unemployment is twice the world average, and it is correlated with educational attainment—the reverse of Western democracies. In Egypt, the ratio of a college grad to elementary school grad unemployment rate is tenfold.

India and China reached 9 and 10 percent growth, respectively, in 2010. However, neither country is expected to sustain the same high growth rates in the next year or the following year.

Dr. Nicholas Lardy, senior fellow at PIIE, who has written extensively on the Chinese economy, says that China can no longer count on exports as an engine of growth. He said at the PIIE program that “what worries him the most” is that China won’t be able to get its domestic “consumption growth going rapidly enough to be a significant driver of GDP and that the economy slows down substantially.”

Brazil, with the largest economy in Latin America, attained 7.5 percent growth in 2010. Mexico, the second largest economy in Latin America, attained 5.5 percent increase in GDP.

Russia suffered a nearly 8 percent decline on 2009, but with the recent increases in petroleum prices, its GDP growth was 4 percent in 2010 and this trend should continue this year and next at 4.5 percent.

Japan Recovery

Even before the disaster on March 11, Japan had problems, according to Nolan, who has written widely on the Japanese economy. He mentioned its slowing economy, deflation, wasteful spending on infrastructure, “white elephants” by politicians, and a debt more than twice the size of the economy. Its unwillingness to allow more immigration to compensate for its shrinking, aging labor force is inhibiting competitiveness.

No doubt Japan will rebuild Sendai and the surrounding areas, as it did quickly with the Ginza earthquake in 1923 (140,000 killed) and Kobe in 1995, Noland said. The economic costs are still unknown and estimates range widely, but Noland put it at 5 or 6 percent GDP. The Japanese people are faced with some choices on how they ultimately respond to the natural disaster of the Tohoku 9.0 earthquake. Will the disaster propel a new dynamic to rebuild not just the region impacted but make the economy more efficient? Will its aging and cautious population now seek the comfort again of one-party rule?

Housing Market Comeback

U.S. GDP growth in 2010 was 2.9 percent. An important factor that throws off the forecasting for U.S. growth is that our housing market has not returned to normal. Economists are at a loss to explain why “residential investment” has not rebounded in the last two years in contrast to the “normal pattern of business cycle recoveries,” says Mussa.

One factor has been the wiping out of two-thirds of housing price gains from 2000 to a peak in 2006, when “real house prices essentially doubled on a nationwide basis.” The fall in prices has “seriously disrupted the entire housing market,” said Mussa. A rising number of homeowners can’t meet their mortgage payments for devalued homes, and among those who can, they have less equity in their homes to contemplate an upgrade.

Also, the market is contracting as many adult children return to living with their parents, due to the economic hard times. The demand for new housing has dropped by about 2.5 million units.

Mussa predicts that these factors, which are depressing the housing market, will gradually dissipate later this year. However, the role that the housing sector plays in the U.S. economy will not be restored to its former level of 6.3 percent (from a drop to 2.4 percent). It will be more like 5 or 5.5 percent, said Mussa.

Chief News Editor: Sol Jose Vanzi

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