Global Economy – Slowdown Blues

With a slew of risks ranging from inflation to rising sovereign debt, and political turmoil in the MENA region, the global economy faces prospect of a lower growth

Faced with a slew of risks – from inflation to rising sovereign debt, and political turmoil in the MENA region, the global economy faces prospect of a lower growth in 2011 though it would rebound in 2012 and remain strong through 2013, forecasts a recent report by the World Bank.

After expanding 3.8 percent in 2010, global GDP is projected to slow to 3.2 percent in 2011 before firming to a 3.6 percent pace in each of 2012 and 2013, says the World Bank in a latest report titled, “The Global Economic Prospects - June 2011.” The study expects the economic growth in developed nations to fall from 2.7% in 2010 to 2.2% in 2011 due to monetary tightening and the after-effects of the earthquake in Japan, among other factors, before regaining momentum to notch up a growth of around 2.6 percent in 2012 and 2013, as the negative effects of household, banking and government budget consolidation begin to fade and rebuilding in Japan intensifies. Excluding Japan, the report says, these economies could grow to as much as 2.7% in 2012 and 2013.

In the developing nations, which have reached full capacity post-the economic crisis of 2008, growth will decline from 7.3 percent in 2010 to around 6.3 percent each year from 2011-2013.

However, it warns that going ahead, inflation, sovereign debt crisis, and fragile geopolitical landscape, especially in the Middle East and North Africa (MENA region), among other factors, pose serious challenges to the global growth. While high food prices, possible additional oil-price spikes, and lingering post-crisis difficulties in high-income countries pose downside risks, high fiscal deficits and rising sovereign debt pose medium-term challenges to a wide-range of OECD countries (gross sovereign debt is estimated to reach 103 percent of OECD GDP in 2012), the report cautions.

For developing countries, there is a need for further belt tightening by adopting measures such as more rapid tightening of fiscal and monetary policy and more exchange rate flexibility so as to avoid overheating and keep inflation in check, suggests the report. 

Strong commodity prices, combined with the rapid closing of output gaps and strong capital inflows, pushed headline inflation in developing countries to near 7% (year-over-year) in April 2011, a more than 3 percentage point increase since low points in July 2009, when concerns of deflation were paramount, according to the World Bank. Headline inflation (y-o-y) in high-income countries too remained high, reaching 2.8 percent in April 2011.

Food inflation in India, Asia’s third largest economy behind China and Japan, rose 8.06% for the week ended May 21, lower than the rise of 8.55% registered in the preceding week. Yet, it remains above the comfort level of the Reserve Bank of India, hinting of further rate hikes by the apex bank in future.

Amy