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IMF declares growth S.O.S

Global economy’s ‘growing pains’ in 2013 has forced IMF to slash its earlier projections for all economies – advanced, emerging and other developing – so that global growth this year would be no better than 3.1 per cent as in 2012. For India, it is marginal reduction for fiscal 2014 from 5.7 to 5.6 per cent. IMF slow growth in key emerging economies as the main reason which, it says, could even prolong, and the continuing recession in the Euro area.  This in effect implies a diminishing role, in the present, for emerging markets led by China and other developing economies (EMDE) which hitherto were in the forefront as the drivers of global growth.

In the July update of its World Economic Outlook (April), IMF said the revision in the growth projections is due to the ‘appreciably weaker domestic demand and slower growth in several key emerging market economies’ as well as ‘a more protracted recession in the euro area’. The update says that downside risks to global growth still dominate while new risks have emerged including the possibility of ‘a longer growth slowdown in emerging market economies’. EMDE now has to reckon with lower potential growth, slowing credit and ‘possibly tighter financial conditions if anticipated unwinding of US monetary policy stimulus (QE) leads to sustained capital flow reversals’. This could lead to a ‘trade-off’ for these economies between macroeconomic policies to support weak activity and those to contain capital outflows. India’s GDP growth has been lowered to 5.6 per cent for fiscal 2014 while it should improve to 6.3 per cent in fiscal 2015, both estimates having been re-adjusted on a fiscal year basis. But growth rates stand reduced for all other BRIC nations, notably for China at 7.8 and 7.7 per cent for the two years respectively (as against the 8.0 and 8.2 per cent in the April estimates).

In major emerging market economies, the update said, growth continued to disappoint reflecting, to varying degrees, infrastructure bottlenecks and other capacity constraints, slower external demand growth, lower commodity prices and financial stability concerns. Emerging market economies have generally been hit hardest from this bout of global market volatility, as the interest rate increases and asset price volatility, combined with weaker domestic activity, have led to some capital outflows, equity price declines, rising local yields and currency depreciation.

Growth will be five per cent in 2013 and 5.4 per cent in 2014, for EMDE as a whole, evolving on a more moderate pace, embodying weaker prospects across all developing regions. The outlook for many commodity exporters has deteriorated due to lower prices. The slowdown in sub-Saharan Africa has to do with larger economies like Nigeria and South Africa struggling with domestic problems and weaker external demand while difficult political and economic transitions would keep some of the Middle East and North Africa economies weak. To promote stronger global growth, IMF calls for additional policy actions in major advanced economies, especially USA and EU. Growth projections for USA are 1.7 and 2.7 per cent in 2013 and 2014. For Euro Area, it would be -0.6 and 0.9 respectively. Japan will do better with growth averaging 2 per cent in 2013 but moderating to 1.25 in 2014. Actions urged for advanced economies like USA are to maintain a supportive macroeconomic policy mix, combined with credible plans for reaching medium-term debt sustainability.

Recession in the euro area with tight fiscal and financial conditions turned out to be deeper than expected. Activity will contract by more than half a per cent this year before recovery to close to one per cent in 2014. Sovereign spreads in the euro area periphery widened in the wake of financial market instability. Reforms are needed to restore balance sheets and credit channels and euro authorities have to take whatever actions are required to mitigate and reverse financial fragmentation, IMF says.The revised forecasts assume that the recent rise in financial market volatility and the associated yield increases would partly reverse, as it largely reflected a one-time re-pricing of risk due to changing growth outlook for emerging market economies and uncertainty around US Fed exiting from policy stimulus. If there is recurrence of volatility and further yield increases, the Update said, there could be sustained capital flow reversals and lower growth in emerging economies.

IMF favours continuation of monetary policy stimulus in USA, given low inflation and sizeable economic slack, until the recovery is well established. Clear communication on the eventual exit from stimulus would help to reduce volatility in global financial markets, it said. The IMF also mentioned that weaker growth prospects in several economies and underlying risks raise new challenges to global growth and employment and global rebalancing. Policymakers everywhere should increase efforts to ensure growth and support global rebalancing through structural reforms.
Rebalancing would imply measures in surplus countries like China, to suitably raise consumption, and Germany and other countries to undertake investments and other measures that would improve competitiveness in deficit economies, according to IMF. IPA
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