Apart from US, most developed economies in decline
With the US third quarter GDP rising from the 3.5% the advance estimate talked of to 3.9% in the second estimate, the economy is growing at a scorching pace. Indeed, with the second quarter’s 4.6% growth, the US hasn’t had this kind of growth in more than a decade. If you leave out the unusual first quarter of this year when growth contracted 2.1% due to an unusually cold winter, the US has had no negative quarter since the beginning of 2011, underscoring the point that the 2008 recession is firmly in the past. The latest quarter’s growth, it is important to keep in mind, has taken place despite inventories contributing negatively to growth. And while exports growth has halved—from 11.1% in Q2 to 4.9% in Q3—due to the exceptionally strong dollar, this has also helped contain imports; on a net basis, exports contributed 0.8 percentage points to Q3 growth, up from a negative 0.34 percentage point contribution in the previous quarter.
While the US is expected to remain robust—the OECD’s latest estimate puts US growth at 3.1% in 2015 versus a likely 2.2% in 2014—the rest of the developed world continues to pose a serious challenge. Though the OECD is looking at euro area growth picking up to 1.1% in 2015, up from a likely 0.8% in 2014—euro area PMI has been above 50 for more than a year now—the fact is the euro crisis is far from over. Even the OECD’s own estimates of when output would finally reach the level it was in 2008 keep getting pushed forward—in November 2010, it was estimated this would happen by mid-2012; by November 2011, this was pushed forward to the beginning of 2014, and the latest estimate is this will take place only by mid-2016. The extremely low growth, in turn, has meant a backlash against reforms and, unfortunately, the ECB is still not in a position to undertake US-style ambitious bond purchases. While Japan remains mired in crisis, the fact that China’s central bank has cut rates for the fourth time in the year indicates the pressure the economy is facing.
All of this has large implications for India since, between them, Europe and China account for around 30% of India’s export basket; indeed, the slowing of India’s exports basket is directly related to the global uncertainty. The flip side is that with non-US central banks creating enough liquidity—Kotak estimates a $1.7 trillion increase in the size of the G-4 central bank balance sheets by the end of 2016—India will continue to attract FII flows; at $39.1 billion so far, they are marginally lower than the peak of $39.4 billion in 2010 when India was growing just shy of 9%.