In my view, three main factors have been driving the recovery over the last year – a bounce back in business and consumer confidence, strong growth in Asia and other emerging markets, and the impact of policy stimulus. These three factors will also have a key bearing on future global economic prospects, and I will discuss them briefly in turn. Recovery in confidence A key factor which plunged the world economy into recession was the massive shock to business and consumer confidence across all the major economies of the world when the global financial system appeared to be rocking and reeling in late 2008 and early 2009. Since then, confidence has gradually recovered as the financial system has stabilised and the shock waves from the traumatic events of eighteen months ago have subsided. 3  See http://www.iata.org/whatwedo/economics/ for data compiled by the International Air Traffic Association (IATA). 4  The 8.5% increase relates to the seven-month period Q2 2009 to Nov–Jan 2010. 5  UK exports of goods and services grew in volume terms by 5.4% per annum from 1992 to 2007; exports of goods excluding oil and erratics increased by 4.5% over the same period. 6  This has been reflected in an upgrading of world growth forecasts for 2010. For example, the IMF forecast of GDP growth across the world economy this year has risen from 1.9% in April 2009 to 3.9% in its latest World Economic Outlook (January 2010).
The initial lift from the fiscal stimulus will likely wane over the course of this year. And financial conditions have become less accommodative over the past several months. In addition, we are now seeing some emerging headwinds to growth from the partial government shutdown in the United States and elevated geopolitical uncertainties abroad. Other “data” confirm that the winds in our sails have calmed. The headlines have been about investors’ concerns around growth, which have contributed to volatility in markets. This is also showing through in surveys of households and businesses, who say that they are somewhat less confident about future economic prospects. For example, the latest Empire State Manufacturing Survey and New York Fed Business Leaders Survey both point to slowing growth in the region. And there is no doubt that my colleagues and I are hearing the same thing directly from our business and financial market contacts, who are more focused on the possibility of a weaker economic outlook this year.3 But let me be clear: a softer economic outlook doesn’t mean we should prepare for doom and gloom. On the contrary, it’s likely we’ll see GDP growth somewhere between 2 and 2½ percent this year. That’s a step down from 2018, but still consistent with a healthy, growing economy. Supporting a Strong Economy So, how should the Fed respond to an outlook of slowing growth and one that’s less certain than, say, this time last year? In a word: carefully.