The world economy is expected to witness a reasonable improvement in growth at 3.5% in 2017 against 3.1% in 2016 as per the IMF report released this week. More importantly, growth improvement is expected to be broad based with advanced economies, in the throes of subpar growth since the global crisis, also witnessing momentum gain. A look at the highlights..
Even though Indian economy is increasingly getting integrated with the global economy, international economic developments receive limited attention in domestic media. However, it is essential to have broad idea of the dynamics of global economy and the 260 page IMF report is an important source for that.
An important highlight of the projections is the improving growth prospects of advanced economies led by US whose growth is expected to jump from 1.6% in 2016 to 2.3% in 2017. While the figure looks unimpressive in the first look, it must be understood that US has a large share in global output at over 20%. This means that increase in US output alone would contribute 0.15% out of total 0.4% increase in GDP growth.
Even though the growth is fairly broad based unlike earlier years, outliers are Middle East and North African countries whose growth rate is projected to fall sharply from 3.8% to 2.3%. Even though part of it is due to economic reasons such as oil production cuts, a large part of it is due to escalation in domestic conflicts & civil wars and persistent drought in African countries.
There are certain idiosyncratic characteristics of global economy, more specifically, the divergence in growth drivers/drags between advanced and developing economies. While inflation remains a major cause of concern for developing economies, advanced economies remains under the shadow of deflation and any event causing prices to rise is not exactly a cause of worry. As per the report, “Higher commodity prices have helped lift global headline inflation and reduce deflationary pressures”..!
The figures for consumer inflation corroborate this anomaly. For the advanced economies, consumer inflation stood at 0.8% in 2016 (0.3% in 2015) and is expected to move up to 2% which actually acts as a stimulant to the economies. On the other hand, it is projected to go up from 4.4% to 4.7% in developing economies and may force central banks to take monetary tightening measures, thereby, adversely impacting the growth.
Despite the optimistic outlook, the report cites number of risks, most notably, the increasing protectionism and ‘inward looking’ policies. However, the adverse impact of it would play out only in the medium term. Specifically citing China, the report mentions the daunting challenge it faces to reduce its dependence on credit led growth with credit to GDP ratio standing at over 200%.