Three trends emerging globally.
By Krishnakumar S.
NEW DELHI: The world economy is currently witnessing to three large trends. One, the growth prospects of the developed economies have brightened. Adding sheen to the same is the figures from the United States, even as Euroland continues to register low rates of growth. Two, as against the reasonable performance of the emerging market economies in the immediate aftermath of the global financial crisis, their rates of growth are now found to be faltering. Three, the decline in commodity prices, including oil, is further resulting in lower prospects of growth in the Middle Eastern, as well as commodity exporting economies of Africa. The actual figures released, as well as estimates and projections made by the World Bank, IMF and World Economic Outlook projections, further testify to these trends.
In case the favorable growth rates in the United States pick up momentum, this would intensify the chances of a faster reversal of quantitative easing than that planned earlier. If that is the case, the worst of the nightmares of the central bankers from Asia to Latin America are all set to come true, with turmoil sure to set in the emerging market economies.
For most of the current flows of capital to the emerging market economies is driven by the large interest rate differential which exists between the advanced and emerging market economies. The buoyancy of economic growth in the United States has already resulted in huge rise in the flow of capital to the US equity and bond markets.
The vulnerabilities of the euro has also resulted in the dollar serving as a safe haven for investors across the world. This flow has resulted in the relative appreciation in the US dollar index in the recent period. From 70 in March 2008, it has reached 90 levels, implying an appreciation of almost 30% vis-a-vis other currencies since the financial crisis.
If the appreciation of the dollar could result in the US current account deficit increasing in the medium term, it could brighten growth in the export platforms of Asia. But, given that the United States is trying its level best to restore and regain competitiveness through countrywide efforts, particularly by putting the labor markets under leash, that would not work. Though growth rate has picked up momentum in United States, it has been riding the tide of the increase in the Shiller housing price index (that is, recovery in the housing prices), as well as the better performance of NYSE. The real wages continue to be stagnant, even though it is not declining, even when the unemployment figures are on the downside. In other words, even as growth recovers in United States, it proves to be as fragile as in the pre-financial crisis period.
As against the situation in the developed and advanced economies, it is projected that the performance of emerging economies is likely to falter, this being so in the context of the low buoyancy on the export front. The reduced rates of growth projected for China would definitely tilt the terms against those economies in Asia and Africa, which heavily count on the demand from China.
In fact, the appreciation of the renmimbi has resulted in the current account surplus of China diminishing over the years. The interconnections of trade which China has crafted with the different Asian and African economies shifts the terms against them, too. All big talk over “Make in India” apart, until the government gives big thrust to capital expenditure in the coming budget, India would be continue to linger at 5% levels of growth.
Moreover, the unfavorable commodity prices, both fuel and non-fuel, has come to haunt the growth prospects of these commodity exporters. The fortunes of Russia, as well as Venezuela, are inextricably linked to the price of oil. The Middle Eastern region might be able to count on the returns from the oil sovereign wealth funds, but the unfavorable price of oil will have a deleterious impact on its spending in the world economy, affecting the export prospects of number of Asian economies, including India.
Many a country would stand to lose on the remittances front, in case the price of Brent crude stabilizes at the current level of $45 to $55, or goes for a further decline. The decline in the price of various commodities, reflected in the decline of the IMF commodity price index (both fuel and non-fuel), has negatively affected the current account balances of different African economies.
The growth slowdown in China as well as the developments in eurozone are likely to make commodity price slowdown to have even worse consequences, pushing the world economy to a deflationary mode. No wonder, the World Economic Outlook makes a strong suggestion towards enhancing public infrastructure spending. At long last, they have realized that mere easing of interest rates through bond purchases won’t suffice, and the missing demand has to be supplied, best, it be done through public infrastructure spending, lest we would have to send our economic policymakers to fight the problem of deflation.
(Krishnakumar S. teaches economics at Sri Venkateswara College, University of Delhi, New Delhi.)