By S. Sethuraman
The world economy looks to have reversed a prolonged slowdown, with the stronger recovery now in advanced economies, and growth is expected to bounce to 3.7 per cent from 3 per cent in 2013, the latter half of which already saw a pickup in both global output and trade.
So much so, IMF begins to wonder whether “the tide is rising”. The forecast for 2015 is even higher at 3.9 per cent, as the World Bank also projected. But the overall picture is not free from downside risks.
IMFs latest economic outlook update – a quarterly exercise initiated during the crisis years -is broadly on the same lines as the World Bank’s assessment of overall trends, especially advanced economies leading the current recovery which, both say, would provide stronger demand for emerging and developing economies to lift their growth rates, “although domestic weaknesses remain” among them.
For India, sounding less pessimistic than in its earlier versions, IMF has estimated growth in fiscal 2015 at 5.4 per cent (rising from 4.6 per cent in fiscal 2014) and significantly higher at 6.4 per cent for the fiscal year ending March 2016. These projections (at factor cost) are still somewhat lower than those of World Bank, which had placed the three year estimates at 4.8, 6.2 and 6.6 per cent respectively.
The Finance Ministry itself is now reconciled to relatively modest projections than the 6 to 7 per cent it toyed with for 2014/15 but nevertheless aiming to hit up to 8.5 per cent in two to three years. It is also looking forward to some upward revisions of GDP for the last two years, by the end of January..
Among EMEs and other developing countries, some may have room for monetary policy support, according to IMF. But this is not the case in India. Although WPI and CPI numbers recently pointed to a weakening of inflation, it has resulted from a sharp drop in vegetable prices, and it is by no means a pointer of a falling trend in inflation. Therefore, it is unlikely that RBI could begin easing monetary policy with a rate cut, however strongly business prefers, in its third quarter review on January 28.
Again, in some economies, and partly applicable to India, IMF sees the need to manage vulnerabilities associated with “weakening credit quality and larger capital outflows”, especially in the context of US Fed tapering of its monetary stimulus gradually. But where slow growth partly reflected structural factors, the main policy approach for raising growth must be to push ahead with structural growth, it is pointed out.
In the case of India, in particular, IMF has noted a growth pick-up after favourable monsoon season in 2013/14, and higher export growth and it is expected to firm further on stronger structural policies supporting investment.
But two downside risks for the world economy have to be kept in view by all economies. One is very low levels of inflation in advanced economies raising the likelihood of deflation in the event of adverse shocks to activity and, secondly, rising corporate leverage, accompanied in many emerging economies, by increased exposure to foreign currency liability.
In several emerging and other markets, asset values could come under pressure if interest rates rose more than expected and adversely affected investor sentiment. IMF has also cautioned about increased financial market and capital flow volatility in the wake of Fed tapering.
Although the first reaction to FED taper announcement was muted, portfolio shifts and some capital outflows are likely. When combined with domestic weaknesses, the result could be sharper capital outflows and exchange rate assessments, as IMF sees it. Thus, ensuring robust growth and managing vulnerabilities have become global priorities despite the expected strengthening of activity over the next two years.
In advanced economies, growth is rated as solid in USA. Growth will be up from 1.9 per cent in 2013 to 2.8 per cent this year, supported by final demand and a reduction in fiscal drag following the recent budget agreement in Congress. With improving prospects, IMF emphasizes, it is critical to avoid premature withdrawal of monetary policy accommodation in US and other advanced economies.
The Euro area is turning corner from recession to recovery and growth is projected at 1 per cent this year and 1.4 per cent in 2015 though recovery would be uneven among the member-countries. Overall growth for emerging market and other economies is expected to increase to 5.1 per cent this year and to 5.4 per cent in 2015.
Growth in China rebounded strongly in the second half due to acceleration in investment. The economy is officially estimated to have recorded 7.7 per cent in 2013 but, IMF says, this surge is expected to be temporary in part because of policy measures aimed at slowing growth and raising the cost of capital. China needs to make more progress in rebalancing domestic demand from investment to consumption to effectively contain risks to growth and financial stability from over-investment (such as high credit growth with its shadow banking lending and rise in property prices)
China’s economy grew 7.7 percent year on year in 2013, according to the National Bureau of Statistics. Its gross domestic product reached 56.88 trillion yuan (9.31 trillion U.S. dollars), according to official sources as against 8.52 trillion US dollars, as revised fro 2012. The economy’s fourth-quarter growth in 2013 also stood at 7.7 percent on government stabilizing measures and the year as a whole recorded 7.7 per cent.
China’s official target for 2014 is 7.5 per cent, as envisaged by IMF which, however, expects growth to slow somewhat to 7.3 per cent in 2015. Its industrial output, however, slowed from 10 per cent in 2012 to 9.7 per cent in 2013.Auto industry was the top gainer in China’s diversified range of manufactures, by surging 14.9 per cent with record sales of 21.98 million vehicles.
According to Mr Olivier Blanchard, IMF Chief Economist, factors contributing to world recovery are diminishing drag from fiscal consolidation, healing, though slow, in the financial system and decrease in uncertainty. One major risk especially in advanced economies, euro area mainly and less in USA, is deflation which means higher real interest rate and higher public and private debt and lower demand and lower growth. (IPA Service)