NationalVOLUME 15 ISSUE # 05

Global economy – a rocky ride

The global economy is undergoing a sea change. China is rising while all other major economies, including the US and Japan, are on the decline. The number 1 position of the US is under threat. Japan too is losing ground. While the EU economy is struggling, the BRICS countries are forging ahead.

The International Monetary Fund (IMF) publishes the World Economic Outlook every year which is a comprehensive report on the state of the world economy. In its last report, the IMF had projected global growth at 3.5 percent for 2017 and 3.7 percent for 2018, lowering its forecast by 0.3 percentage points for both years. The IMF forecast a slowdown in China and said that the Euro area would continue to languish. According to the IMF report, slower 2016 growth in China reflected the decision by the authorities to take care of some of the imbalances which are in place and the desire to reorient the economy towards consumption and away from the real estate sector and shadow banking.

On the other hand, the World Bank had predicted that the global economy would grow 3.3 percent in 2017. The IMF report is largely in line with remarks by its managing director some time back in which she had said that falling oil prices and strong US growth were unlikely to make the IMF more upbeat. According to IMF, the Euro zone and Japan would suffer a long period of weak growth and low inflation. Projections for emerging economies were also cut back, with the outlook for oil exporters, like Russia, Nigeria and Saudi Arabia, worsening the most. The IMF also lowered projections for Brazil and India, two major BRICKS countries.

The IMF noted that the ups and downs in oil prices have adversely affected the economies of both developed and developing countries. The IMF report noted two other consequences of oil price fluctuations. Lower oil prices will give central banks in emerging economies leeway to delay raising benchmark interest rates, while some countries will also get a chance to reform energy subsidies and taxes. On the other hand, the interests of commodity importers and exporters will suffer a setback. Oil exporters would be able to draw on funds they amassed when prices were high and can allow for substantial depreciation in their currencies to cushion the economic shock of plunging prices.

However, the prospects for the world economy seem to have improved lately thanks to some new developments. The latest report in this regard came from the Paris-based Organisation for Economic Cooperation and Development which sharply upgraded its economic forecasts for the Euro zone because low oil prices and the European Central Bank’s programme of quantitative easing lifted hopes for the region’s rapid recovery.

In its Interim Economic Assessment, the OECD said that it expected the Euro zone to grow by 1.4 per cent in 2017 and 2 per cent in 2018. This was 0.3 percentage points faster than previously anticipated for both years and in line with the latest forecasts from the ECB. However, the OECD believed that global growth was excessively reliant on monetary policy, and that governments needed to accelerate structural reforms and increase investment spending to complement what central banks were doing.

In its report, the OECD had painted a positive outlook for Japan, saying that growth could accelerate to 1.4 per cent in 2018, faster than anticipated. At the same time, the OECD played down fears of deceleration of the US economy, leaving its forecasts unchanged. The UK was predicted to grow at a slower than earlier predicted by the OECD.

On the downside, the OECD warned that the environment of low inflation and low interest rates created a growing risk of financial instability. It pointed out that excessive reliance on monetary policy alone was building up financial risks, while not yet reviving business investment. In this context, it recommended that a more balanced policy approach was needed, making full use of fiscal and structural reforms, as well as monetary policy, to ensure sustainable growth over the longer term.

For developing countries both IMF and OECD surveys contained guidelines which they must study and follow to keep their economies on a sustainable growth path. While there were new factors supporting growth, but negative forces were also at work, including the lingering legacies of the financial crisis and lower potential growth in many countries. This militated against the prospects of growth in production and exports. To cope with the challenges ahead, developing and emerging economies will have to follow accommodative monetary policies. But the most important of all are structural reforms without which it is impossible to plan for long-term, sustainable growth.

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