|Slipping on oil|
|Tuesday, 12 April 2011 00:00|
A week after RBI deputy governor Subir Gokarn indicated that the central bank would continue to hike rates in order to prevent inflation from spiralling, the IMF’s World Economic Outlook (WEO) gives much the same message. The WEO reiterates that there was no major change in the Fund’s projections for global growth from that made in the January WEO—after a 5% growth in 2010, the April WEO also projects that global growth in 2011 will be 4.4% (that for advanced economies has been lowered 0.1%, to 2.4%). That said, the WEO projects a sharp hike in inflation levels in the months ahead. As compared to a projection made in January of a 6% hike in consumer prices in 2011 for emerging and developing economies, the April WEO’s project is a sixth higher at 6.9%. This higher inflation is driven by a 44% higher projection for non-fuel commodities like food (the January projection was 11% over those in 2010 as compared to 25.1% in April) and a whopping 62% hike in oil inflation (from 13.4% in the January projection to 35.6% in the April projections). While that’s terrible news for India’s beleagured oil PSUs who’ll now have to shell out a lot more in subsidies, it presents a greater macro problem. As RBI raises interest rates (the IMF says India’s real rates are lower than they were three years ago), this could reduce investment rates. All of which means the policy environment will continue to be a bit iffy.
While the IMF sticks to its January growth forecasts, it adds the “downside risks continue to outweigh upside risks”. Much of this risk has to do with higher oil and non-oil commodity prices, but there are other problems as well. In the US, while corporate activity is picking up, the pace of fiscal consolidation has been tardy—instead of falling 0.9% of GDP, the IMF projects the US structural deficit will rise 0.6% of GDP in 2011. In overall terms, the global growth momentum is up, stock markets in the US are approaching their pre-crisis peaks. Indeed, despite the crisis in Japan, the impact on global GDP is expected to be minimal—Japan’s GDP is projected to grow 0.2% slower than was projected in January. What matters, of course, is not the impact of individual events but the impact of all of them when combined together. As for that, the IMF concludes “many old policy challenges remain unaddressed (fiscal adjustment in OECD) while new ones (runaway commodity prices) come to the fore.”