Economic outlook cloudy
Source: By Jayshree Sengupta: The Tribune
THE outlook for the world economy is not too bright, according to the IMFs latest World Economic Outlook. According to the IMF, the US is not going to grow above 2 per cent this year. The assumption behind the Federal Reserve’s announcement in June about the plan of slowing down its monetary easing policy was based on signs of economic recovery and a GDP growth rate of over 2 per cent. The Fed started the monetary easing policy in 2009 in order to help economic recovery in the US and it involved the Federal Reserve’s buying $85 billion worth of US Treasury Bonds every month and releasing the dollars in financial markets. This helped in keeping interest rates low.
According to the IMF, the US growth rate will be down by 0.2 per cent points for both 2013 and 2014. It also says that the US economy will grow only at 1.7 per cent this year and 2.7 per cent next year. Nor will India, Brazil, China and Russia grow at a fast rate. The slowdown in the emerging economies is going to be responsible for the slow growth of the world economy. India is thus not alone in facing slow growth because all the other BRICS countries too are facing slower growth — a 2 percentage point slower growth than expected and this slow growth would knock off half a percentage point of growth from US growth rate. Thus the growth of BRICS matters to the US and the world.
Different emerging economies have had different problems. According to the IMF, infrastructural constraints and bottlenecks have slowed down growth like in India. In some other countries capacity constraints have stifled growth, and among some big exporters like Russia, it is the low commodity prices that have hurt its growth.
The IMF has pointed out that some of the Middle East and North African countries are witnessing disruptive political transitions that are slowing demand. There is a weakening of demand in countries like Nigeria and South Africa, which are weighing down the growth prospects of the whole sub-Saharan region.
Also, according to the IMF, the recession in the Euro area has proved to be deeper than expected in recent months because of the persistence of tight credit conditions, low demand and cuts in the government budget spending. Some countries in the EU like Italy are facing a downgrade by investment rating agencies because of precarious government finances. But on the whole the IMF is confident that at least 17 member countries of the EU will improve their economic outlook next year but will still be growing at the low rate of 0.9 per cent.
The new forecast about the US economic outlook has cast doubts on the timeliness of the announcement by Fed Chairman Ben Bernanke regarding tapering off of its monetary easing policy. When the US Federal Reserve announced that it would slow its asset buying programme or monetary easing, it sent shudders around the globe, including India, and stock markets plummeted. This was because the US government’s bond-buying programme had helped FIIs to access dollars released by the Federal Reserve for investment in the emerging markets. The announcement about the tapering off led to financial markets becoming volatile and bond yields rose.
The bond yields or interest rates rose due to the bond value decline. FIIs headed back to the US to invest in Treasury Bonds as they expected a rise in interest rates. Now with the recent IMF forecast, Ben Bernanke has announced that the US central bank will pursue an accommodating monetary policy in the immediate future which means it will probably continue with monetary easing for some more time. As a result, stock markets, including the BSE Sensex, have gone up all over the world.
The rising yields on the other hand, warned the IMF, largely reflect a one-time re-pricing of risk. The IMF also added, “However if underlying vulnerabilities lead to additional portfolio shifts, further yield increases and continued higher volatility, the result could be sustained capital flow reversals and lower growth in emerging economies”.
The World Bank has also noted that businesses and governments of many low-income developing countries, which have got themselves into huge infrastructure projects financed with rates that were lower because of the Federal Reserve’s past policy of pushing down interest rates, will now be in trouble. The interest rates had been near zero for the last six years. But now when interest rates rise, some of these projects might fail, revealing financial bubbles that could cause economic turbulence.
Higher interest rates abroad may mean trouble for the Indian borrowers who borrowed money under the relaxed rules of External Commercial Borrowings (ECB) when interest rates were low. They will now be forced to undertake higher financial outgoes as rates are hiked across the developed countries. This heavy interest burden could further deteriorate the current account deficit situation in India. The pressure on the rupee is thus unlikely to ease in the future to any great extent.
With a depreciated rupee, which has undergone a rapid depreciation of 26.6 per cent in the past few months, the oil import cost of the government will go up further and it is one of the reasons behind another and the most recent petrol price hike. All other import costs will also go up and since imported inputs are important for exports, there will be a decline in exports. Already the industrial growth has slowed down to a dangerously low level of 1.5 per cent. The GDP growth, which depends on industrial growth, may have to be revised downwards. More than anything, employment prospects will be much less rosy in future.
It is manufacturing that absorbs most of the semi-skilled and unskilled labour and its growth has slowed down to 2 per cent. The manufacturing sector constitutes over 75 per cent of the overall index of industrial production. Only 11 out of 22 industries have shown positive growth in May 2013. If there is a further dip in manufacturing activity, it would mean fewer jobs for the poor. Already unemployment has risen in the past two years.
Inflation as measured by the Wholesale Price Index will be up though it has been at 4.7 per cent. The retail inflation is already quite high at 9.8 per cent. Onion prices are on the rise and a further rise in vegetable prices may be expected due to floods. The policy-makers will have to once again focus on controlling inflation and how to raise manufacturing growth to bring relief to the common people.
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