The global economy continues to slow down. In its latest update to its World Economic Outlook, the International Monetary Fund has cut back its global growth estimates for 2020 to 3.3 percent, 0.1 percent lower than its October 2019 estimates and for 2021 by 0.2 percent to 3.4 percent.
An analysis of available figures shows that the sharp drop in growth in India accounted for the lion’s share of the downward revision. The expected GDP growth in India was slashed by as much as 1.2 percentage points this year and 0.9 percentage points in 2021 to 5.8 percent and 6.5 percent, respectively, compared to the October forecasts.
The US-China trade accord has led to an upgrade of China’s growth forecast to 6 percent in 2020, with a slight slowdown to 5.8 percent projected for the next year. On the other hand, the US growth rate has been trimmed by a tenth to 2.0 percent this year and to 2.1 percent in 2021, because of the fading stimulus effects from 2017 tax cuts and the monetary easing by the Federal Reserve.
Eurozone growth has also been marked down by 0.1 percentage points from October forecast to 1.3 percent for 2020, largely due to a manufacturing contraction in Germany and decelerating domestic demand in Spain. However, receding risks of a hard Brexit have helped stabilize the outlook for Britain and the EU somewhat. Other emerging markets also saw a downgrade in forecasts including Chile which had been hit by social unrest and Mexico that will grow only by 1 percent in 2020, down from 1.3 percent forecast in October, 2019. Brazil has stabilized and its growth forecast is up.
Another forecast has been made by Oxfam which has warned the world leaders of growing social inequality and the pressures it was generating. According to its information, the world’s 2,153 billionaires now have more money than the 4.6 billion poorest people. In the words of the Oxfam chief, “The gap between the rich and the poor can’t be resolved without deliberate inequality-busting policies.”
Although the updating of data in the WEO by the IMF is a routine affair, the latest outlook is important due to a number of unusual factors behind the preparation of growth forecasts which have impacted the projections in one way or the other.
The most important factor is the easing of US-China trade tensions which has lessened uncertainty and encouraged the IMF to say that global growth appears to have bottomed out but there is no rebound in sight because the Phase II of the deal between the two largest economies is yet to be concluded.
Obviously, the IMF cannot say something very definitive unless the underlying causes of trade tensions and other fundamental issues are resolved. The importance of the agreement can be gauged from the fact that China’s 2020 growth forecast was revised upwards by 0.2 percentage points to 6.0 percent just because Phase I of the trade deal included a partial tariff reduction and cancelled tariffs on Chinese consumer goods.
It is also obvious that India has emerged as an important economy on the global scene and a sharp slowdown in its growth is causing a slowdown worldwide. India is struggling with declining consumption and investment, budget deficits and delays in making structural reforms. Besides, constant confrontation with Pakistan and simmering tensions within the country due to the Kashmir issue and some unwise decisions such as the controversial citizenship law are making things more difficult for New Delhi. Most of these issues are endemic and will take considerable time to resolve. However, experts have noted that while post-Brexit prospects for England and the EU are brighter, a healthy private consumption has helped to upgrade the growth projection in Japan.
In the overall context, Oxfam has done well to highlight the problem of growing social and income inequality between the rich and the poor. It is scandalous that the world’s 2,153 billionaires are having more money than the 4.6 billion poorest people. If such a level of inequality is allowed to persist or grow without any checks, the world is sure to see a social upheaval in the coming years which could easily wash away the gains of the present development. As such, proper economic policies need to be adopted to narrow the gap between the rich and the poor in a meaningful manner.
At Davos every year, the rich and powerful from all over the world gather to survey the state of the global economy and discuss possible solutions. But nothing comes out of these deliberations and the world economy continues to stagnate with no early recovery in sight. The same has happened this year. They came, they discussed and they dispersed.