Media release - 15 December 2010 

 Media release - 15 December 2010 

World Risk Developments December 2010: the year that was and the one ahead

The December edition of EFIC’s newsletter, World Risk Developments, is an ‘end of year stocktake’ of the key world risk developments in 2010 and the prospects for the global economy for 2011.

2010: Strong recovery despite hangovers and macro imbalances

The year saw the world economy stage a strong recovery from the 'Great Recession' of 2008-09, with only eurozone GDP remaining below its pre-crisis GDP peak. 2010 also saw the volume of world trade returned to its pre-crisis level, following its collapse of 2008-09.

However, as EFIC’s Chief Economist Roger Donnelly explains, 2010 was also the year in which the euro area debt crisis escalated, an ‘international currency war’ broke out and the US Federal Reserve launched a second round of quantitative easing. Underlying these more problematic developments were two issues: the debt hangovers that many countries continued to struggle with, and the stubborn current account imbalances between many advanced and many emerging countries.

2011: Growth to remain strong if euro crisis doesn’t escalate

So what are the big macro implications for 2011 of these debt hangovers and imbalances, and the debt crises and currency wars that they have spawned?

Donnelly explains that while risks related to sovereign debt, competitive currency market manipulation, protectionism and failure to achieve international policy coordination could mount in 2011, they won’t necessarily prevent vigorous global growth. This is because emerging market economies are now a bigger share of the world economy and are growing quickly, which should offset much of the weakness in advanced economies. In his view, the biggest risk to the global recovery is an escalation of the euro area debt crisis, which has the potential to cause a renewed global credit crunch.

Although the risks of sovereign debt default within the euro area and of the exit of one or more countries from the currency union have risen, these events are unlikely to materialise in 2011.

The continued rise of emerging markets led by China and India will show no sign of moderating, and the leading emerging market economies will continue to buoy global growth, Donnelly says.