IMF’s cautious optimism

The latest edition of the IMF’s flagship publication, World Economic Outlook, is cautiously optimistic on the prospects for the global economy. The update, prepared on the eve of the spring meeting of the IMF and the World Bank in Washington, projects a modest growth in world output by about 3 per cent in 2013, going up to 3.6 per cent in 2014 and to 3.9 the next year. This increase is attributable to the pick-up in the industrial economies led by the U.S. Economic conditions around the world have not changed substantially since the last report released in October 2013. Global economic recovery is becoming broader, but across many countries it is still uneven and below par. Reiterating its earlier observations,

the WEO points out that the global economy continues to move in a two-speed recovery mode but it is the developed world that is the locomotive providing traction for it. In the early post-recovery period, developing economies led by India and China were providing the traction, making up for the slack in the advanced economies. The roles have been reversed dramatically. The IMF’s 2014 growth forecast for the U.S. at 2.8 per cent is the highest among advanced economies. It will move up to 3 per cent next year and will continue to drive global growth. Eurozone economies have recovered, but growth is expected to be weak and fragile in countries such as Italy beset with high government debt.

For India and China, the outlook remains unchanged from January. The IMF quite optimistically expects India’s GDP to grow by 5.4 per cent in 2014 and by 6.4 next year. While official statistics have so far pegged growth at below 5 per cent, the IMF’s estimate does corroborate the views of certain sections that the economy has bottomed out and can, from now on, only go up. Amid the improving global economy, the IMF points out that acute risks have decreased but certain risks have not disappeared. New risks such as low inflation in developed economies and geopolitical issues have emerged in addition to the existing factors such as non-completion of financial sector reform and infrastructure shortfalls. The two-speed recovery of the world economy has certain positives for India. Exports to advanced countries will go up. But on the other hand, the richer countries are in the process of trimming their ultra-soft monetary policies. This could even threaten macroeconomic stability in countries heavily dependent on short-term flows. The IMF should persuade richer countries to synchronise their stimulus withdrawal programmes with the policies of major emerging economies such as China and India.