World economic outlook: A changing pattern
Over the last two decades globalization has become an unstoppable juggernaut. Developments in one part of the world affect the daily lives of people in other corners of the globe. Crop failure in one country drives up prices all over. Similarly, a production glut, say in China, causes a price decline in Europe and America.
International organizations like the IMF, World Bank, OECD, EEC and many others regularly come up with reports and forecasts that need to be studied minutely by developing countries like Pakistan in order to adjust their policies accordingly. The International Monetary Fund publishes the World Economic Outlook every year which is a comprehensive report on the state of the world economy. In its recent report, the IMF 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 2017 growth in China “reflects the welcome 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.”
However, the IMF’s forecasts are far rosier than World Bank predictions that the global economy would grow 3.3 percent in 2018. The IMF report is largely in line with remarks by its Managing Director Christine Lagarde some time back in which she said that falling oil prices and strong US growth were unlikely to make the IMF more upbeat. According to the IMF, the euro zone and Japan could suffer a long period of weak growth and dangerously 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 BRICS countries. The United States was the only silver lining in an otherwise dismal report for major economies, with its projected growth raised to 3.6 percent from 3.1 percent for 2017. The United States’ performance is said to have partly compensated for the continuing weakness in the euro area.
The Fund noted that the drop in world oil prices, which have fallen more than 50 percent in recent years, is largely the result of OPEC not cutting supplies. It expected the decrease in price to continue despite some temporary reversals followed by a downward movement again. The IMF report noted two other likely consequences of oil price decline. 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 dull 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 has come from the Paris-based Organisation for Economic Co-operation and Development (OECD) which has sharply upgraded its economic forecasts for the euro zone because low oil prices and the European Central Bank’s programme of quantitative easing have lifted hopes for the region’s rapid recovery. The OECD has also raised its predictions for global growth, predicting Japan and India will expand more than previously forecast.
In its Interim Economic Assessment, the OECD has said that it now expects the euro zone to grow from 1.4 per cent in 2017 to 2 per cent in 2018. This is 0.3 percentage points faster than previously anticipated for both years and in line with the latest forecasts from the ECB. According to the OECD, the global economy is expected to grow by 4 per cent next year. However, the OECD believes that global growth is excessively reliant on monetary policy, and that governments need to accelerate structural reforms and increase investment spending to complement what central banks are doing.
Germany, where wages are finally picking up after a long phase of stagnation, is expected to grow by 1.7 per cent this year, 0.6 percentage points faster than the OECD predicted in its November report, and slightly higher than last year. But the recovery is forecast to spread broadly across the continent, with the OECD economists lifting their forecasts for France and Italy by 0.3 and 0.4 percentage points to 1.1 and 0.6 per cent respectively.
The OECD report has painted a positive outlook for Japan, saying that growth will accelerate to 1.4 per cent in 2018, faster than anticipated. It also markedly upgraded the forecasts for India, which is now expected to grow by 7.7 per cent next year. This is more than a percentage point faster than previously thought, suggesting India will expand at a more rapid pace than China over the next few years. At the same time, the OECD has played down fears of deceleration of the US economy, leaving its forecasts unchanged.
But there is also a downside. The OECD has warned that the environment of low inflation and low interest rates creates a growing risk of financial instability. It has pointed out that excessive reliance on monetary policy alone is building up financial risks, while not yet reviving business investment. In this context it has recommended that a more balanced policy approach is needed, making full use of fiscal and structural reforms, as well as monetary policy, to ensure sustainable growth over the longer term.
For Pakistan, both the IMF and OECD economic surveys contain guidelines which we must study and follow to keep the economy on a sustainable growth path. No doubt, there are new factors supporting growth such as lower oil prices. But negative forces are also at work, including the lingering legacies of the financial crisis and lower potential growth in many countries. This militates against the prospects of growth in exports. To cope with the challenges ahead, Pakistan will have to follow accommodative monetary policies and keep the real interest rates low. Pakistan must also undertake overdue structural reforms to support long-term growth.