Worries on global growth

India being much more dependent on domestic drivers of growth remains a bright spot but it is not without its challenges, among them the underlying inflationary pressures and private investment likely remaining constrained by weakened corporate and public bank balance sheets.

The International Monetary Fund publishes the World Economic Outlook every quarter. It gives us the IMF’s best current assessment of the global economy and near term prospects. The latest one published this month paints a grim picture. The IMF has reduced its forecast made in July for growth during 2016 for many economies. This downward revision in itself is not new and fits the trend seen in recent years.

It is as if the IMF begins the year with a somewhat rosy picture, and then every quarter has to confront new and discouraging data. This repeated pattern raises questions about whether the beginning of the year optimism is justified at all. Be that as it may, the outlook is clouded by several factors affecting two of the largest economies in the world.

In the age of Internet and digital innovation, why is US productivity stagnant and declining?  The present US outlook is further clouded due to uncertainty about economic policies. 

The United States is showing a slow recovery, and with low and stagnant productivity. Its growth (projected at 1.6 percent for 2016, down from 2.6 per cent last year) now sits 0.6 per cent lower this year compared to the July projection and 0.8 per cent lower than the outlook in the April IMF report.  Labour output per hour, a measure of productivity, has been on a broad downward trend for past 15 years. This is part of a larger puzzle. In the age of Internet and digital innovation, why is US productivity stagnant and declining?  The present US outlook is further clouded due to uncertainty about economic policies.  Will the Federal Reserve Bank start raising policy rates, and go in for monetary tightening? For more than a year, it has “flattered to deceive”, signalling an impending rate hike but holding back when the times to make that call.

Of course, when the US rates actually start climbing, it will be disruptive to the world, as was experienced during the so-called “taper tantrum” of May 2013.  That was when the mere mention of an impending rate hike caused stock markets to crash worldwide, and currencies went into a tailspin. Remember the rupee panic of 2013? Added to US monetary policy uncertainty is the noise emanating from the Presidential campaign. Of course much of it may be electoral campaign rhetoric, but the rhetoric this time carries many ugly dimensions and heightens uncertainty in an already difficult economic scenario. Will the US turn more protectionist? Will immigration policies undergo radial change? Will taxes increase or decrease sharply? These are new challenges to the global economy from rising voices against globalisation and free trade, coming from the very nations that espoused these policies.

The second largest economy, China, too is slowing. Last year its growth dipped below the psychological seven per cent. It will decline further this year and the next. China’s slowdown is dressed up as strategic rebalancing, and therefore presented as a product of conscious policy. The rebalancing is along five dimensions: 1. Moving away from export dependence to domestic demand; 2. Moving away from investment-led growth to consumption (China’s share of consumption was barely 35% of GDP a few years ago compared to 65 per cent for India); 3.Moving away from industrial growth to a greater emphasis on services; 4. Encouraging the private sector and downplaying the model of growth driven largely by public sector enterprises; and 5.Placing a greater emphasis on the longer term consequences as against the present. This means growth will be greener, less polluting, more environment conscious. China and the US jointly ratified the Paris treaty recently at the G20 meeting in Hangzhou. China is implicitly saying that it will accept lower growth today, so that tomorrow’s growth and development is not jeopardized. It will leave enough “environment capital”, and not deplete forests at the rate which it was doing so far.

Yet, there are worries that China’s slowdown is not going as per plan and is not as deliberate as is made out. Three of the large manufacturing-intensive provinces have faced negative growth, which is unheard of in China. Idle capacities and jobs anxiety are rising. Since the crisis of 2008, China has injected a monetary stimulus of unprecedented proportion. Aggregate debt has ballooned. Estimates of non-performing assets range from 10 to 25 percent of bank loans. How the huge debt will be reduced (i.e. deleveraged) is anybody’s guess. Of late, China is also trying to weaken its currency, to perhaps get back to export stimulus. It risks being labelled a “currency manipulator” by the US Congress, especially in this heated election season. Of course the tepid demand in Western economies is not helping China’s exports.  There are concerns about the huge overhang of idle capacities in China (e.g. steel, textiles), and the possibility of Chinese goods being dumped in other markets.

Chinese demand is nearly 50 percent of world demand for most commodities, such as base metals, coal, iron ore, wood pulp and cotton. So a slowdown in China has caused a steep fall in commodity prices, which has affected commodity-exporting countries very negatively.

The last time China aggressively devalued its currency was in 1994. That cast a long shadow in East and South East Asia. It is said that the seeds of the Asian crisis were sown in that devaluation. Of course, other local factors contributed too. Twenty-two years later, China is a bigger presence in the region and the world. Economic disruption in China can now spill over with greater force.

For instance, Chinese demand is nearly 50 percent of world demand for most commodities, such as base metals, coal, iron ore, wood pulp and cotton. So a slowdown in China has caused a steep fall in commodity prices, which has affected commodity-exporting countries very negatively. The fall in oil prices on the other hand was more due to the shale revolution in US, than in falling demand. India has mostly benefited from the fall in commodity prices, but this is not so for Brazil or Russia, and other commodity exporters.

So China’s slowing growth, and its anticipated aggressive monetary actions, including currency weakening, and unfair trade practices, are all a concern for the rest of world. India being much more dependent on domestic drivers of growth remains a bright spot in the global economy. Indeed it is now the fastest growing large economy but it is not without its challenges, among them the underlying inflationary pressures and private investment likely remaining constrained by weakened corporate and public bank balance sheets.

The writer is a senior economist based in Mumbai