Difficult to figure out which is a bigger drag on growth
Not surprisingly, given the European crisis is once again looking like it’s spinning out of control over the unduly oppressive austerity drive, the IMF has once again lowered its projections for global growth. From a 4.1% projected 2013 global growth just 6 months ago, the IMF’s latest 2013 projected growth is now 3.6%—the 2013 forecast for India is down from 7.3% to 6% over the same period. While the 3.6% projection is much lower than 2010’s 5.8%, it’s a significant step up in growth over 2011. Only problem is, the 3.6% growth is predicated on two pretty huge ifs and buts. First, the IMF says the projection is predicated on Europe adopting “policies that gradually ease financial conditions further in periphery economies”. Two, it assumes, quite erroneously, that the US will tackle its ‘fiscal cliff’ even though there is little sign of this happening—while the fiscal cliff implies a cut in government spending of more than 4% of GDP, the IMF’s baseline projections assume a reduction of just 1.25% in the structural deficit. Given the lack of clarity in either the US or the European assumptions turning out to be correct, the IMF says there is now a 1 in 6 chance of global growth falling below 2%, which means a recession in advanced economies and low growth in emerging and developing economies—this probability, by the way, was a dramatically lower 4% just 6 months ago. In 2013, the IMF estimates there’s a 15% chance of a recession in the US, above 25% in Japan given the post-Kobe recovery is now over, and above 80% in the euro area—in April, the euro area probability was around 50%.
For India, the bad news is that estimates of global trade growth have been further pared, from 12.6% in 2010 and 5.8% in 2011 to an estimated 3.2% in 2012 and 4.5% in 2013—in January this year, the 2012 projection was 4.2% and the 2013 projection was 5.8%. The saving grace, though, is the projection on oil prices rising just 2.1% in 2012 and falling 1% in 2013—in July, these projections were 6.3% and 5.5%, respectively. If these projections aren’t looking up despite QE3, it’s because of the expected slowdown in China—previous versions of QE weren’t accompanied by as much of a slowdown as we’re looking at now in emerging markets. While things are looking a bit better in India right now, in terms of investor perception if not in terms of actual growth, between Europe and the US, things could look worse in no time. And there’s always the likelihood that India’s ruling alliance, currently frightened into allowing the Prime Minister and the finance minister to take some corrective action, may once again assert itself and demand more concessions. The Food Security Bill, a UPA election promise, is already out there hanging like a sword of Damocles, and it’s not the only one.