Global Economy in 2015: To Face Very Strong Headwinds?

Dr BK Mukhopadhyay

Whither global economy! IMF [Intertiol Monetary Fund] Maging Director Christine Lagarde very rightly reflected the latest goings– ‘strong headwinds from weak investment, substantial debt burdens and high unemployment are preventing a pickup in global economic growth despite a strengthening U.S. recovery and tumbling oil prices. Accordingly, a healthier U.S. and cheaper energy won’t suffice to actually accelerate the growth or the potential for growth in the rest of the world.’

The World Bank cut its outlook for global growth, saying a strengthening U.S. economy and plummeting oil prices won’t be enough to offset deepening trouble in the Euro zone and emerging markets. The Washington–based development institution expects the global economy to expand 3percent this year, up from 2.6percent in 2014, but still slower than its earlier forecast for2015.

The bank’s economists see oil prices, which have lost more than half their value in the last six months, providing uneven benefits to major oil importers. The tumble in oil has bolstered the U.S. recovery by giving consumers more money to spend, leading the bank to revise up its growth projection for the world’s largest economy by 0.2 percentage point to 3.2percent. But the price plunge is failing to spur stronger growth in importers such as Europe and Japan, while exacerbating fincial problems in major oil exporters. Kaushik Basu, the World Bank’s chief economist, opines that the global economy is being pulled by a single engine—the U.S. economy. “This does not make for a rosy outlook for the world…. It is really not enough.”

Then, what is the exact situation?

Clearly, as the situation stands now the global economy is becoming more and more unstable due to the ongoing decoupling between major economic blocs. The United States and Britain are recovering at a faster–than–expected pace, and the probability of a key rate hike is on the rise. In contrast, manufacturing industry indices are relatively poor in Chi and deflation risks are intensifying in the Euro zone and Japan. Situations are even worse in the Euro zone and Japan. The former’s economic growth rate for the second quarter of this year was zero, and those for Q4, 2013 and Q1, 2014 had been 0.2 percent each. Japan posted a negative growth of 6.8 percent in Q2 this year to hit a 39–month low.

Both Europe and Japan are at risk from a much longer period of excessively low inflation and anemic growth. Years of stagtion in two of the world’s biggest economies also threaten to drag down global growth. That would make it even harder for those economies to cut their dangerously high debt levels and raise employment – two main persistent legacies of the fincial crisis. The Bank of Japan expanded its cash injections to help spur growth, while European Central Bank officials sigled for a new bond–buying program.

So far as the oil front is concerned, the fall should, on balance, boost global growth, as consumers have as of now more money left to spend in other sectors of the economy. But the decline is also adding to deflation risks in Europe and Japan, bolstering the case for central bank action.

However, under the ongoing facts and circumstances economies like India, Bangladesh, Malaysia, among others, show signs of gaining strength.

Japanese companies have ranked India as the most preferred destition for investments. The business sentiments of Japanese companies were revealed in a survey conducted by Japan Bank for Intertiol Cooperation in July 2014. The survey of 1,000 Japanese manufacturing companies ranked India as the number one destition for future investments, followed by Indonesia and Chi.“Some Japanese companies are seriously contemplating their future investment plans in India amounting to about Rs 75,000 crore ($12 billion) in next two–three years,” accordingly. 

The World Bank projected India’s growth at 5.5 percent in fiscal 2014–15, accelerating to 6.3 percent in 2015–16 and 6.6 percent in 2016–17 as it urged developing countries to double down on domestic reforms. Subdued manufacturing activity and a sharp slowing of investment growth in India led to GDP growth in South Asia as a whole, slowing to an estimated 4.7 percent in market price terms in calendar year 2013, accordingly.

The growth in South Asia was 2.6 percentage points below average growth in 2003–12, the World Bank noted in its latest twice–yearly Global Economic Prospects report that also lowered projections for global economic outlook. Most of the acceleration is localized in India, supported by a gradual pickup of domestic investment and rising global demand.

The World Bank cautioned that forecasts assume that reforms are undertaken to ease supply–side constraints (particularly in energy and infrastructure) and to improve labour productivity, fiscal consolidation continues, and a credible monetary policy stance is maintained.

The suggestion is very realistic – a gradual tightening of fiscal policy and structural reforms are desirable to restore fiscal space depleted by the 2008 fincial crisis. Especially, fiscal policy needs to tighten in countries where deficits remain large, including Gha, India, Kenya, Malaysia, and South Africa. In addition, the structural reform agenda in many developing countries, which has stalled in recent years, needs to be reinvigorated in order to sustain rapid income growth.

In today’s interdependent world many aspects of sustaible development are in fact intertiol or even global. On the one hand, many decisions taken at the tiol or even local level actually have intertiol consequences––economic, social, and environmental. When these consequences are negative, the situation is sometimes referred to as “exporting un–sustaibility.” On the other hand, tiol policies are often idequate to effectively deal with many challenges of sustaibility. Thus, intertiol cooperation on the wide range of so–called trans–boundary and global problems of sustaible development becomes indispensable. That is why  we have to start thinking about a country’s development in a global context—comparing countries and searching for useful lessons of development experience gained from around the world— and looking forward to what can realistically be achieved with the passage of time.

To conclude in the line of IMF Chief: the high risk of recessions and years of slow global growth are what policy makers need to take more aggressive action on. Besides pushing for a longer period of easy–money policies and more infrastructure investment, the IMF has been urging the Group of 20 largest economies to honor promises for economic overhauls to reignite growth prospects.

Especially, for economies with high dollar–denomited debt, the need is very much there to see the traffic sigl – at a time when currency values fall and growth prospects turn to be dim, investors would certainly rethink – look before the leap – direction of  their high–risk investments.

Yes, policy makers have to step up structural reforms in as much as in many economies, efforts to restructure labor and product markets, overhaul education, health, and social safety nets, or approve trade deals that would open up protected markets, have been facing stiff political hurdles. Some economists fear that the longer growth remains weak, the more politically difficult those economic policy changes may become.

We have to counter the triple risk – from a stronger U.S. dollar, higher global interest rates and volatile capital flows. So, it is risk magement that continues to exist at the top!!

(The Writer, a noted Magement Economist and an Intertiol Commentator on Business and Economic Affairs, can be reached at m.bibhas@gmail.com)