COLUMN-Countering home bias in economic analysis: John Kemp

Mon Dec 5, 2011 8:46am EST

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By John Kemp

LONDON Dec 5 (Reuters) - Financial journalists and commentators across North America and Western Europe are still struggling to come to terms with the shifting centre of gravity in the world economy.

Too many articles and papers are trapped in a narrow parochialism that sees advanced economies as the "core" of the world economy and relegates emerging markets to a relatively less important "periphery".

As a result, far too many assessments of the global outlook start from the premise that the economy is doing terribly. In fact the economy is growing close to its long-term average rate. There is no sign of a significant output and employment gap at the global level. Markets for oil and other commodities such as copper and iron ore are close to balance and do not show significant excess capacity.

The problem is not overall growth but its distribution between the advanced economies and emerging economies. The result is a severe imbalance between strong growth and inflation in emerging markets and certain commodity-producing countries compared with stagnation, unemployment and rising prices in many of the so-called advanced economies.

Because most senior policymakers, international institutions and media organisations are based in advanced economies, their assessments tend to be coloured by local concerns in those areas. In too many instances, economists, journalists and policymakers extrapolate from their local experience and assume the rest of the world must be experiencing the same conditions. Nothing could be further from the truth.

GROWTH, BUT NOT EVENLY SHARED

The world economy is on track to grow almost 4 percent in 2011, according to the International Monetary Fund (IMF) in the latest edition of its World Economic Outlook (WEO September 2011). Output will rise slightly faster than the average for the last three decades (3.33 percent). The difference is well within the normal variability for global growth as measured by the standard deviation (1.34 percentage points).

There is no crisis at global level. After a deep and synchronised downturn in 2008-2009, the world economy has bounced back remarkably quickly. Unfortunately, growth is not evenly shared. The rebound has revealed some painful structural shifts in activity.

Advanced economies are set to grow just 1.6 percent in 2011 and 1.9 percent in 2012, according to the WEO, well below the average of 2.5 percent since 1980. The G7 economies are set to fare worse, with output rising just 1.3 percent this year and 1.7 percent in 2012, compared with a 30-year average of 2.3 percent.

In contrast, emerging economies are expected to grow 6.4 percent in 2011 and 6.1 percent in 2012, well above trend and almost one and a half times faster than the average since 1980 (4.5 percent) ().

It is misleading to generalise from conditions in one country or group of countries to the experience of the global economy as a whole. Britain, the United States and parts of Europe may be facing the prospect of a "lost decade" following the banking, real estate and sovereign debt crisis, but the rest of the global economy is doing just fine. Past experience suggests it may be able to weather the storm without too much ill effect.

Regional imbalances are nothing new. Japan's lost decade and Germany's post-reunification restructuring in the 1990s and early 2000s was actually a period of very strong growth and low inflation in the United States and the United Kingdom.

Global growth is much steadier than growth in any one country or group of countries. For the world economy as a whole, output has grown since 1980 by roughly 3.35 percent per year, with a standard deviation of 1.32 percentage points.

Output growth has shown much more variability in individual countries such as France (1.38 percentage points), Australia (1.64 points), Italy (1.78) and the United States (2.1), let alone China (2.72), Brazil (3.35) and Argentina (5.94)

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