The Hindu : Global economic recovery

Online edition of India's National Newspaper
Tuesday, Apr 23, 2002

Opinion

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Global economic recovery

THE INTERNATIONAL MONETARY Fund's forecasts of global economic growth, put out twice a year in the World Economic Outlook, have rarely turned out to be very accurate estimates. But the forecasts contained in the April 2002 edition of the WEO are of particular interest since there are signs that the global downturn is ending much earlier than expected. This is good news for India since the slowdown in the international economy has been blamed for the sharp deceleration in export growth during much of 2001-02 and even the official projections for the current financial year have been of a low growth.

Six months ago, when the WEO made its forecasts in October 2001, the IMF had predicted that the U.S. economy would grow in 2002 by a mere 0.7 per cent, but it is now confident that growth would be 2.3 per cent and accelerate to over 3 per cent next year. The European Union will not witness a similar acceleration but since it did not experience a large deceleration last year this will not have a negative effect on overall growth. And while Japan is one large economy which is still expected to contract in 2002 the overall picture, driven by the U.S. recovery, is of global expansion of 2.8 per cent. This is only marginally higher than the 2001 growth rate of 2.6 per cent, but the comparison should be with what might have been if the U.S. economy had not recovered. The impact of this recovery on global trade is of a contraction in the volume of trade in 2001 turning into a modest expansion this year, which too would pick up in 2002. This will be welcomed by all developing countries, though their expected export growth of 4.8 per cent this year will still be far below the impressive 15 per cent expansion they registered in 2000. A larger question must be about the strength of the global upturn, since there have been other and more conservative forecasts which suggest that the recovery will be a weak and short-lived one. While the IMF discounts such a possibility, it has highlighted three possible weaknesses. The first is the high levels of household and corporate debt that are still present in the U.S., the second is the huge current account deficit of the U.S. (which could have its own implications for the U.S. dollar) and third, perhaps the biggest threat given the present political situation in West Asia, the price of oil. The WEO suggests that every $5 increase in the international price of a barrel of oil will result in 0.3 percentage points being shaven off the global economic growth rate. Considering that the present global price of oil has already crossed $26 a barrel, while the IMF's estimates are based on a price of just $23, a continuation of the bloodshed in Palestine holds the real threat of nipping the global recovery in the bud.

As in the recent past, China and India are seen as holding up overall growth although based on the valuation of their GDP on market exchange rates their weight in the world economy is not large enough to make a difference. The picture is different when GDP is measured on a purchasing power parity basis, which considerably boosts the size of both economies. However, the key issue here is the reliability of the estimates and of the quality of growth as well. The weakness of Chinese economic data is increasingly become apparent, while in India's case it is a question of the authenticity of growth estimates based on service sector expansion. The WEO has made a more cautious assessment of India's fortunes in 2002, placing growth at just 5.5 per cent as against the optimistic prediction of 6 per cent made recently by the Asian Development Bank. But if there is some degree of accuracy in the IMF's forecasts of GDP growth of the advanced countries, the estimates for India — which are essentially extrapolations of the official Indian data — are much less so.

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