|Dangerous new phase|
|Wednesday, 21 September 2011 00:00|
A reduction in estimates of global growth, from 4.3% for 2011 to 4% and from 4.5% for 2012 to 4%, is in itself a source of comfort, given the daily dose of alarming news from both the US and the EU. That, however, is an incorrect way to read the IMF’s latest World Economic Outlook (WEO) report released late evening yesterday. For one, the US growth forecasts have been cut by around 1 percentage point each for 2011 and 2012—that’s a 40% reduction in GDP growth for 2011 and 33% for 2012. And that’s the baseline estimate which includes a reasonable forecast of risks. If, however, the risks go off the chart—in the event of bigger sovereigns starting to default in Europe—the numbers could look very different. Economists show the upside/downside risk through a ‘fan’ diagram, with the ‘baseline’ forecast in the middle and the upside and downside forecasts making the top and bottom legs of the ‘fan’. When you look at that in comparison with the ‘fan’ in April, the downside risk is greater. In April, the IMF’s estimate was that the lowest global growth would fall to was about 2.5% (its ‘baseline’ growth was 4.3%); in September, this lowest level of global growth is 1.5%, or a full 40% lower. In the event of things spiralling out of control in the EU or the US—if the Republicans refuse to accept President Obama’s proposals, for instance—the WEO estimates growth in these countries could fall by as much as 3 percentage points below what has been projected for 2012, that is, these countries will fall into recession.
On oil, despite the lower GDP growth, the WEO has little to offer by way of hope and points to lowering of supply growth, the balance of which leaves oil price growth estimates pretty much unchanged.
Although policymakers in India will scoff at it, the IMF argues that capital inflows are overwhelmingly a function of local factor and not global ones—the WEO says 70% of net inflows into emerging markets in the 2000s was a result of the policy regime in these countries and not a result of what global market conditions were like. Not surprisingly then, the IMF sticks to its traditional argument that India needs to tighten both monetary and fiscal policy (it favours a reduction in the debt-to-GDP ratio of 8 percentage points over a decade) to control inflation—in the context of the OECD, citing different circumstances, the IMF argues that “front-loaded fiscal consolidation in turn may lead to even lower growth”. In contrast to the still rosy forecasts by the Prime Minister’s Economic Advisory Council, the WEO forecasts an average Indian GDP growth of 7.5% to 7.75% during 2011 and 2012, partly due to global conditions and partly due to what it calls “recent corporate sector governance issues”.