Global Slowdown

Businessworld
Srikanth Srinivas

The International Monetary Fund’s (IMF) World Economic Outlook (WEO) — a biannual report published every April and October — has estimates of 3.7 and 3.8 per cent of projected global growth for 2008 and 2009, which are lower by a full percentage point since January this year. The slowdown will be more persistent than earlier thought, it seems.

True, much of this slowdown will be felt in the US; growth prospects for that country have deteriorated more rapidly: Growth estimates for 2009 are 1.2 per cent lower. As US banks and financial institutions continue to take hits to their assets, those already pessimistic projects could go even lower: the WEO points out that if global growth falls below 3 per cent, we will be in a global recession. The probability of that happening is estimated at 25 per cent.

But there is a silver lining. Emerging markets, led mainly by China and India, will boost overall global growth, says the WEO; any slowdown in those economies is likely to be moderate, as they have no exposure to the credit crisis that has gripped the US and Europe.


Major concerns

The WEO identifies three major concerns that could impact the global economy more adversely that it has already:

Inflation — led largely by higher energy and food prices — is rising all over the world.

A price boom in the commodity markets. At least in part, says the IMF, the recent run up in commodity prices could be the result of investors seeing it as an alternative asset class.

Third, the financial shock emanating from the collapse of the housing markets and the subprime mortgage market crisis has inflicted considerable damage to institutions at the core of the financial system. Low liquidity in inter-bank markets and weak capital adequacy in banks has fuelled concerns about credit risk.

Risks for emerging markets

While India and China (and other emerging markets) will continue to experience high growth despite the global slowdon, their economies too will have to deal with some looming issues:

High on the risk table for emerging markets — including India — is high and persistent inflation. The producer price index — or the wholesale price index (WPI) in India shows some cause for alarm. In both China and India, producer prices show double-digit growth. Producer prices — mainly oil and raw material inputs — are rising faster than consumer prices.

Agricultural production — and given food price inflation — is a cause for concern. Tightening liquidity conditions, perceived high interest rates, a domestic credit shock and capital outflows together could be the perfect storm that drives growth rates below 6 per cent.

Prospects for India

Finance Minister P. Chidambaram doesn’t think that such a big drop in growth rate is likely either, even as he acknowledges that a slowdown may be necessary to bring down inflation, particularly food price inflation which can be critical in this election season.

We are reasonably self-sufficient in major commodities, and the food supply is more or less in balance. But food prices and commodity are likely to remain high, driven by growing incomes; but how much of that inflation is permanent and how much temporary is to be seen.


So while India may be relatively insulated from the contagion of the credit market, this is no time for complacency either. As IMF’s Johnson says, now is the time when prudent governments should draw up contingent plans to guard against deeper ‘tail risks’ — the risk that an unlikely event that can create catastrophic results.