upn-taipei news-bank-2010-12-08-05-Citi expresses cautious optimism on global economy in 2011

Citi expresses cautious optimism on global economy in 2011
Taiwan’s GDP growth to hit 10 percent in 2010: Citi
Asia will dominate world’s economy in next decade

Taiwan’s GDP growth is expected to rise 10 percent this year before returning to a normal pace of 4.2 percent in 2011 and 5 percent in 2012, according to Citibank Taiwan Ltd today, December 8.

Citi expressed cautious optimism about the world’s economy next year, said Citi chief economist Cheng Cheng-mount during a press conference to unveil the global economic outlook in 2011.
The economy worldwide in 2011 will maintain this year’s strong momentum with different ranges of growth across regions, according to Citi’s research report. It upgraded its growth estimates for major countries such as the US, the Euro Area, Japan and China, as well as emerging markets.
Overall, Citi predicted that the global economy will expand by 3.4 percent in 2011 and 3.8 percent in 2012. Although the growth rates are slightly lower than 3.9 percent in 2010, the macro environment performed better than the previous economic cycle due to strong growth in emerging markets. The global economy registered an average growth rate of 2.9 percent per annum between 1999 and 2008.
In 2011, each country’s growth pace and policies will face diversified challenges. Clouded by concerns of government debt, major nations will continue to adopt a tightened fiscal policy. However, on the front of monetary policies, advanced countries are expected to postpone the exit of loose monetary measures. The US and the Euro Area will not hike rates until 2012. Other countries which have started raising rates, especially in emerging markets, will continue with rate hikes or apply capital inflow controls, so as to tighten capital on the market to counteract inflation and asset bubbles.
Citi forecast that the world’s largest economy, the US, will see a growth rate of 2.5 percent in 2011, slightly lower than this year’s 2.7 percent. Corporate investment and private consumption will both surge, while government spending and growths of imports and exports will slow down. With a mild inflationary pressure, the Fed will continuously adopt its loose monetary policy. As early as one year ago, the US companies were already profitable enough to hire new employees. The unemployment rate is likely to drop as companies gradually put their extra cash in investment and the interest rate remains at the low level.
Seriously affected by the sovereignty debt crisis this year, the Euro Area’s GDP growth will slide to 1.4 percent in 2011, from 1.6 percent this year. Citi forecast that the sovereignty debt crisis will remain a major challenge in 2011. Government debt in Greece, Ireland and Portugal might face restructuring. If inflation and credit expansion do not display considerable uptick, the governments will not raise rates until 2012.
As domestic employment and private consumption are not recovering yet in advanced industrial countries, those whose exports account for a larger proportion in GDP are likely to benefit from exports-led growth momentum, such as the UK, Japan, Germany, Switzerland, Sweden and Australia.
In Asia, except for Japan’s mild growth at 1.4 percent, all the other nations maintain robust growth due to continued increases in private investment and consumption, as well as infrastructure construction. In the future, Asian emerging countries will mainly reply on the region’s rising demand to fuel growth, and the countries which have stronger interaction in trade within the region will receive greater benefit.
Citi projected that, driven by the two major emerging countries—China and India, Asia will gradually dominate the global economy within the next decade. As what Citi has previously forecast, China and India overtake Japan and Spain, respectively, to become the world’s second and 10th largest economies this year.
Citi believed that China is likely to replace the US between 2020 and 2025 to be the largest economy in the world, and India might overtake the UK and France in 2015 economically. As a result, five among the world’s top 10 economies in 10 years to come will be emerging markets, which are China, India, Russia, Brazil and South Korea. Three countries in the top four economies will hail from Asia—China, Japan and India.
A general challenge facing Asian countries in 2011 is the continued inflow of international hot money, which builds up pressure for tightening monetary policies and capital controls. Cheng analyzed that international hot money inflows are caused by structural reasons, including western countries’ loose monetary policies continually providing liquidity. In addition, Asian governments’ intervention measures can merely produce short-term effects but cannot stem the long-term trend of capital inflows and currency appreciation due to bright economic prospects and stable growths across Asia. As a result, an increasing number of Asian markets will be dedicated to combating asset inflation, especially China, Singapore, Hong Kong and even Malaysia.
Citi predicted that China’s GDP growth will slightly cool down to 9.2 percent next year, from this year’s 10 percent. China’s economy has expanded by over 8 percent per annum for 20 consecutive years. Next year, it will focus on economic transformation and balancing the growths of quality and quantity, including boosting household income, accelerating urbanization, relaxing relevant regulations in the service sector and price controls. China will therefore facilitate industry integration, as well as upgrade and increase investment in the consumption industry.
If China’s growth evidently slows down, the markets which have deeper interaction with China will be affected, especially Singapore, Hong Kong, Taiwan, Korea, Malaysia and Thailand.
In Taiwan, domestic demand, such as private consumption and investment, will be the major growth factors next year when exports slow down. Cheng revised upwards his projection for Taiwan’s GDP growth this year to 10 percent. He also predicted that the economic expansion will ease off in the first half of next year before the growth momentum picks up in the second half, leading the growth rate for the entire 2011 to return to a normal pace of 4.2 percent. In 2012, the strength continues with the GDP growth climbing up to 5 percent.
As Taiwan’s commodity prices are relatively stable compared with neighboring countries, Citi believed that the central bank will gradually relax its tightened monetary policies in 2011 and accelerate the pace in 2012 with the economy continuously picking up. In addition, the central bank will pay close attention to asset prices and the hot money issue while implementing appropriate control measures. The movement of fiscal policies will depend on a number of budget and tax reforms.

Other emerging markets share the same rosy economic outlook with Asia. With the same advantages of stable government finance and sufficient private savings that fuel investment, these countries will remain the favorite destination for international capital. The governments do not worry about how to achieve strong growths, but how to tighten monetary policies and capital controls to prevent inflation and hot money inflows. Brazil, for example, has announced several rate hikes in 2010 and boosted deposit reserve ratios by the year-end by 20 to 50 percent to curb asset bubbles.


Figure 1: Forecasts for major countries’ economic performances














Figure 2: Forecasts for Taiwan’s economic indicators





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