|When PIGS fly|
|Thursday, 27 January 2011 00:00|
With the IMF raising 2011’s global GDP growth projections to 4.4%, down compared to 2010’s 5% but higher than the projections for 2011 made just a few months ago, things are clearly looking up. Nor is it that you need the IMF to spell this out for you, the signs are obvious—global stock markets are up, default spreads have gone down dramatically in most areas, especially in the US, volatility levels are lower, consumer confidence is up … all of which suggest the worst is over, though the stubbornly-high unemployment levels underscore the delicate nature of the recovery. Indeed, the reason why 2011 growth is projected to be lower than 2010’s is that a large part of the past growth has been driven by government stimulus packages and, though private investment is looking up, the headroom for more stimulus is low. The fact that there are still no credible plans to reduce OECD debt levels suggests interest rates could rise and dampen the growth impulse. While there is no clarity on this, the fear that the Portugal, Ireland, Greece, Spain (PIGS) banking crisis could spread is quite real. To the extent core Europe has substantial financial linkages, IMF economists flag this as an area to watch. If it spreads, and Europe’s banks tighten credit in the manner that happened in the US post-Lehman, the projection is that one percentage point could be shaved off global growth.
A lot then depends on what happens in emerging markets, such as India, which account for 40% of global consumption and more than two-thirds of global growth. The issues here are of money flowing in from OECD and creating asset bubbles; oil is projected to be $90 per barrel for 2011 as compared to $79 for 2010 and non-commodity prices are projected to grow 11% in 2011. You can see the impact of this in a country like India. With inflation stubbornly refusing to come down, RBI has raised interest rates, some say by not enough, and this is certain to choke off growth. Indeed, inflation has become the big concern for investors in emerging economies—any slowing of flows will impact growth in these economies and, by implication, global growth. Not the best of times for those with weak stomachs.