The topsy turvy global economy

Dr B K Mukhopadhyay

India should be one of the world’s fastest growing economies. IMF pegs India to be one of world’s fastest growing economies. India’s growth rate is expected to rise to 7.5 per cent this year and next, making it one of the fastest growing economies in the world, according to the IMF’s latest economic health check. Having said that it is still welcome to see India growing well and that well over a billion people are getting richer is welcome in itself. It’s not all roses and plain sailing though! While it looks like there will be good growth for the next couple of years, barring disasters, there’s some structural problems that need to be addressed if that’s to continue on into the medium term - this all comes from the Intertiol Monetary Fund’s recent report on the economic outlook for the region:

An observation on this score would be very pertinent: given what we know about economic growth the poorer a country is the easier it ought to be to have fast growth. On the very simple grounds that the things that are necessary to have growth have already been invented elsewhere and it’s only implementation that needs to happen.

According to the Intertiol Monetary Fund’s (IMF) Regiol Economic Outlook for Asia and the Pacific, the other Asian giant Chi’s economy is slowing to a more sustaible pace – 6.8 per cent GDP growth in 2015, and 6.3 per cent in 2016,

Let us have a look at what others are opining.

Very recently, the investment banking arm of Brazil‘s biggest private bank, Itau Unibanco (ITUB), released their outlook for the next 8 years on key markets around the globe. The specific observation is that boom days are over. In Itau’s view, sluggish growth will persist in the U.S. and Chi‘s economy — once it shifts to a more domestic focused economy– will filly see potential GDP average around 7 percent or below.  In addition, older demographics means lower growth than in the last ten or twenty years.

However, Itau doesn’t think that slower growth is a bad thing. A decline in fixed asset investment is potentially more dangerous, and how Chi mages that change will depend whether it is successful in soft landing the economy. Specifically, it opined that Chi might be slowing down, but the U.S. economy will struggle to grow above 2 percent next year, and for a good three years afterwards.

Even after an 18-month recession that saw, from peak to trough, a 5 percent drop in GDP, the U.S. economy has grown at an annual pace of only 2.5 percent, despite fiscal and monetary boosts. It is a weak recovery compared to previous recessions. The country’s potential growth is also slowing due to a slow down in labor growth (demographics), lower growth in capital stock to 2.8 percent from 3.7 percent and lower gains in total factor production to 0.6 percent from 0.7 percent. ‘Whoever is elected president in November will oversee a steady, but slow, U.S. economy’.

What about the other emerging developing economies? Brazil is not going to suddenly become a ‘productivity powerhouse [like Chi’].  In order to attain increase of the capital stock the country must increase its savings rate coupled with more high tech, plus developing new technologies for its massive deep water oil discoveries. Though the unemployment rate fell to 6 percent in 2011 from 13 percent in 2003, yet skilled engineers is becoming harder to find as Brazil builds out. Annual population growth, at 1.5 percent in mid-1990, is expected to drop to 0.6 percent by the end of this decade, while expansion in the labor force is projected to slide to 0.9 percent in 2020 from 2.3 percent now. Absence of structural reforms in recent years here is a point to take note of.

Goldfajn’s base-case scerio for the other Latin American countries, assess that investment rates will be sustained at high levels and productivity will advance at a pace similar to the one observed in recent years. Even with less-favorable demographic trends than in recent years, the drop in potential growth in the region should be modest.  Foreign direct investment and government investment will be highest in Peru in terms of investments per GDP. Chile and Colombia will come in a close to second and third. However, in relation to the average of the last decade, Colombia will likely have the largest increase in investment rate. This is a direct result of the reduction in crime rates and of reforms adopted in recent years, especially in the energy sector.

Though the massive quantitative easing program implemented by the European Central Bank, combined with the weak value of the euro, will help prop up growth in the Euro-zone this year, yet real GDP growth will remain below 2 per cent. Moreover, double-digit unemployment rates and weak wage increases in many Euro-zone countries continue to threaten the economic recovery in this region. Portugal is the worst off, but comparatively still in much better shape than Greece, with more political cohesion.  Though Greece is unsustaible and unlikely to leave the Euro-zone this year at least, yet it’s outlook is similar to that of Argenti in the early 2000s when it defaulted on debt.

It has been the fact that Europe’s potential growth is hindered somewhat by a shrinking labor pool and migration, there is potential for increased capital stock by 1.8 percent  and total factor productivity to rise, as per ongoing  assessments - thanks to higher investment.

So far as India is concerned the words of IMF is very relevant: while several recent policy measures have helped eased supply-side constraints, further measures are needed in the energy, mining and power sectors. Reforms to streamline and expedite land and environmental clearances, increase labour market flexibility, and simplify business procedures should continue to improve India’s business climate which is crucial for sustaining faster and more inclusive growth.

Thanks are also due to other developing economies which are also coming up steadily.

The credit rating agency has rated Bangladesh’s outlook as stable for the sixth consecutive year. Moody’s Investors Service has projected Bangladesh’s outlook as stable again for the current year saying that the country’s growth volatility is lower than for almost all other countries rated by the global credit rating agency.

Bangladesh is rated Ba3 with a stable outlook, the Moody’s said in its latest alysis. The Moody’s said that Bangladesh’s Ba3 foreign currency government bond rating reflects its track record of macroeconomic stability, a modest debt burden, and limited exterl vulnerabilities with an ample foreign reserve buffer. But a fractious political environment, rrow tax revenue base, and a very low level of per capita income constrain the rating. Although fiscal deficits are mageable, public finces are constrained by weak revenue collections. Authorities have recently embarked on wide-ranging revenue reforms based on automated systems. “Such reforms, if successful, would result in a considerable widening of the tax base,” the Moody’s noted. Politics remain a looming risk to Bangladesh’s robust economic performance, according to the credit rating agency.

In the overall sense : growth in the global economy is expected to pick up slightly this year, mainly due to the stimulus provided by lower oil prices and strength in the U.S. economy - the global economy is expected to expand by close to 3 per cent this year, up from 2.6 per cent in 2014 according to the Conference Board of Cada’s World Outlook, Spring 2015. The observations are very pertinent -  while world economy is benefiting from lower energy costs which are boosting real incomes and household spending,  and  at the same time, improving the current account balance of oil importing countries,  uncertainty still domites much of the global outlook, including the threat of deflation in both the Euro zone and Japan, and the ongoing conflict in the Ukraine as well as unrest in the Middle East.

(The Writer, a noted Magement Economist and an Intertiol Commentator on contemporary business and economic affairs, attached to The West Bengal State University, can be reached at m.bibhas@gmail.com)