Rising protection, slowing population & productivity
Though the IMF is looking at a slight improvement in global growth next year—from 3.1% in 2016 to 3.4% in 2017—much of the growth is going to come from emerging and developing economies; in 2016, it could be as much as three-fourths. Indeed, that dependence will increase over time. GDP growth in developed economies is projected to rise from 1.6% in 2016 to 1.8% in 2017 and fall slightly to 1.7% by 2021—that in emerging/developing economies will rise from 4.2% to 4.6% and finally to 5.1%. What is worrying, however, is the downside risks to the forecasts, especially for developed economies—that is the primary reason why these forecasts have been revised downwards with each update of the World Economic Outlook (WEO) over the past few years. The October 2014 WEO, for instance, projected 2015 global growth at 3.8% while the actual turned out to be a much lower 3.2%; in the case of global trade in goods and services, it projected a 5% growth in 2015 against the much lower 2.6% when the final numbers came out. Projections for trade growth in 2016 have been scaled down from 4.1% to 2.3% already and the final numbers are yet to come out.
There are various reasons for the slowing growth. One, the slowing population growth has pushed economic output lower than expected. Two, with little investments in these economies, the productivity per employee is slowing—that is limiting disposable income which, in turn, is resulting in a lower investment situation … In the period 2008-14, the IMF points out, labour productivity growth was below pre-crisis trends for all but one of a sample of some 30 advanced economies.
In such an environment, increased trade is an obvious way out since this is what propelled growth in the post-World War II period. Yet, as IMF points out, the world is seeing increased protectionism—the Trump campaign, needless to say, epitomises this view. Between 1985 and 2007, real world trade grew on average twice as fast as global GDP while it has barely kept pace over the past four years—in absolute values, the IMF points out, the volume of world trade in goods and services has grown by just over 3% a year since 2012, which is less than half the average rate of expansion during the previous three decades. While the slowing of trade has a lot to do with global investment demand slowing, especially in China, as well as due to changes in Chinese supply-chains which has made its GDP growth less import-intensive, increased protectionism has shaved off as much as 1.75 percentage points of annual global import growth since 2012. Since it is not clear whether global leaders will be able to get together to reverse the de-globalisation being witnessed, getting global growth back on track will take a lot of time, even assuming China is able to slow in an orderly fashion. While slow trade growth will act as a ceiling to India’s growth ambitions, the good news is that in the current—and projected—global scenario, India shines like a beacon of hope.