Advanced economies are now the growth engine
At 3.6% for 2014, the IMF’s global growth projections are higher than growth in 2013, and potential trouble areas like the Euro zone look better than they have for a while with PMI in manufacturing up for the ninth consecutive month. The problem, however, is that growth projections are dramatically lower than they were a year ago—projections for output in 2014 are down from a 4% growth in April last year to a lower 3.6% in the latest World Economic Outlook released by the IMF. Part of the problem—though that may be a blessing in disguise as well—is that US growth projections have been tempered down a bit, from 3% last April to 2.8% now, possibly a result of US GDP growth falling from 4.1% in September 2013 to a much lower 2.6% in the December quarter. While European growth projections have held at around 1.1-1.2% for 2014, the real problem is in the emerging world this time around.
As IMF managing director Christine Lagarde puts it, for the past five years, the emerging market and developing economies have been shouldering the burden of recovery, accounting for nearly three-fourths of the global growth since 2009. With this engine floundering, it is not surprising that global growth prospects are also looking shaky. Growth estimates for emerging markets for 2014 have been pared down from 5.7% a year ago to a more sobering 4.9%—China’s numbers from 8.2% to 7.5%. While the IMF continues to be sanguine about China’s growth prospects, the credit boom and its aftermath continue to be a serious cause for concern. Though the debt numbers for local government—30.6% of 2012 GDP—look reasonable, these are up 67% since 2010, suggesting attempts to control local government debt have been largely unsuccessful. More important, much of this has been invested in property—real estate investments are up to 15% of GDP, up from 10% in 2008. Few other countries that have seen the kind of credit booms China has—more so, given the sensitivity to property prices—have managed to avoid either a credit or a growth crisis.
Theoretically, the Chinese slowing can be more than made up by US growth, and chances are the IMF could be wrong on the strength of the US recovery. US household balance sheets are almost back to pre-crisis levels, which is why even though US growth tanked in the December quarter, the contribution of personal consumption expenditure hasn’t been higher in the last 12 quarters—the sharp fall in investment was behind the showing in the overall GDP, and this was due to a slowing in inventory build up and a massive reduction in government spending. But, as the IMF points out, a sharper US recovery would have its own spillover since this could result in an aversion to emerging market investments. The bigger danger is that, in Europe especially, continued economic slowdown has reduced potential output—what Lagarde calls ‘low-flation’—and that requires more unconventional monetary policies, increased government spending. The added political threat of Ukraine doesn’t help. For India, the key metric is that global trade projections for 2014, though higher than the actuals for 2013, are being lowered steadily, from 5.3% a year ago to 4.3% right now.