Global economy in 2015: Facing strong headwinds

Whither global economy? IMF Managing Director Christine Lagarde has very rightly reflected the latest goings-on. Speaking at the Council on Foreign Relations in Washington on January 15 she observed: Strong headwinds from weak investment, substantial debt burdens and high unemployment are preventing a pickup in global economic growth despite a strengthening U.S. recovery and tumbling oil prices. Accordingly, a healthier U.S. and cheaper energy won't suffice to actually accelerate the growth or the potential for growth in the rest of the world.
The World Bank cut its outlook for global growth, saying a strengthening U.S. economy and plummeting oil prices won't be enough to offset deepening trouble in the eurozone and emerging markets. The Washington-based development institution expects the global economy to expand 3.0 per cent this year, up from 2.6 per cent in 2014, but still slower than its earlier 2015 forecast.
The Bank's economists see oil prices, which have lost more than half their value in the last six months, providing uneven benefits to major oil importers. The tumble in oil has bolstered the U.S. recovery by giving consumers more money to spend, leading the Bank to revise up its growth projection for the world's largest economy by 0.2 per centage point to 3.2 per cent. But the price plunge is failing to spur stronger growth in importers such as Europe and Japan, while also exacerbating financial problems in major oil exporters. Kaushik Basu, the World Bank's chief economist, opines that the global economy is being pulled by a single engine -- the U.S. economy. "This does not make for a rosy outlook for the world…. It is really not enough."
Then, what is the exact situation?
Clearly, as the situation stands now the global economy is becoming more and more unstable due to the ongoing decoupling between major economic blocs. The United States and Britain are recovering at a faster-than-expected pace, and the probability of a key rate hike is on the rise. In contrast, manufacturing industry indices are relatively poor in China and deflation risks are intensifying in the Eurozone and Japan. Situations are even worse in the Eurozone and Japan. The former's economic growth rate for the second quarter of this year was zero, and those for Q4, 2013 and Q1, 2014 had been 0.2 per cent each. Japan posted a negative growth of 6.8 per cent in Q2 this year to hit a 39-month low.
Both Europe and Japan are at risk from a much longer period of excessively low inflation and anemic growth. Years of stagnation in two of the world's biggest economies also threaten to drag down global growth. That would make it even harder for those economies to cut their dangerously high debt levels and raise employment - two main persistent legacies of the financial crisis. The Bank of Japan expanded its cash injections to help spur growth, while European Central Bank officials signalled for a new bond-buying programme.
So far as the oil front is concerned, the fall should, on balance, boost global growth, as consumers have as of now more money left to spend in other sectors of the economy. But the decline is also adding to deflation risks in Europe and Japan, bolstering the case for central bank action.
However, economies like India, Bangladesh and Malaysia, among others, show signs of gaining strength.
Japanese companies have ranked India as the most preferred destination for investments. The business sentiments of Japanese companies were revealed in a survey conducted by Japan Bank for International Cooperation in July 2014.The survey of 1,000 Japanese manufacturing companies ranked India as the number one destination for future investments, followed by Indonesia and China. "Some Japanese companies are seriously contemplating their future investment plans in India amounting to about Rs 75,000 crore ($12 billion) in next two-three years," accordingly.  
The macro-economic situation of India is improving in terms of inflation which is under control and the growth in the lead economic indicators such as IIP (international  investment position), core infrastructure and exports. The real GDP (gross domestic product) of the country has improved to 5.5 per cent in the first half of 2014-15 as compared to 5.0 per cent in the corresponding period of 2013-14. India is now better placed as compared to six months ago as economic fundamentals are improving and the economy is looking up. At this juncture, the economy is emerging as an investment destination once again which is visible from the recent Vibrant Gujarat Summit which witnessed signing of a whopping 21,000 Letters of Intent worth Rs. 25,000 billion (25 lakh crore).
India's foreign exchange reserves stood at $319.47 billion for the week ending  January 09, 2015. Foreign currency assets - the biggest component of the forex reserves - were placed at $294.84 billion.  India's reserve position with the IMF stood at $1.12 billion. Good going indeed.
It is well known a fact today that the industrial environment is crucial for any economy to grow in the higher trajectory and the government has to focus on this of which improvement in the ease of doing business is on top of the agenda.
The World Bank also projected India's growth at 5.5 per cent in fiscal 2014-15, accelerating to 6.3 per cent in 2015-16 and 6.6 per cent in 2016-17 as it urged developing countries to double down on domestic reforms.
However, the growth in South Asia was 2.6 percentage points below average growth in 2003-12, the World Bank noted in its latest twice-yearly Global Economic Prospects report that also lowered projections for global economic outlook. Most of the acceleration is localised in India, supported by a gradual pickup of domestic investment and rising global demand.
The World Bank cautioned that forecasts assume that reforms are undertaken to ease supply-side constraints (particularly in energy and infrastructure) and to improve labour productivity while fiscal consolidation continues and a credible monetary policy stance is maintained.
The suggestion is very realistic. A gradual tightening of fiscal policy and structural reforms are desirable to restore fiscal space depleted by the 2008 financial crisis. Especially, fiscal policy needs to tighten in countries where deficits remain large, including Ghana, India, Kenya, Malaysia, and South Africa. In addition, the structural reform agenda in many developing countries, which has stalled in recent years, needs to be reinvigorated in order to sustain rapid income growth.
In today's interdependent world many aspects of sustainable development are in fact international or even global. On the one hand, many decisions taken at the national or even local level actually have international consequences - economic, social, and environmental. When these consequences are negative, the situation is sometimes referred to as "exporting unsustainability." On the other hand, national policies are often inadequate to effectively deal with many challenges of sustainability. Thus, international cooperation on the wide range of so-called transboundary and global problems of sustainable development becomes indispensable. That is why  we have to start thinking about a country's development in a global context - comparing countries and searching for useful lessons of development experience gained from around the world - and looking forward to what can realistically be achieved with the passage of time.
To conclude in the line of IMF Chief: the high risk of recessions and years of slow global growth are the reasons why policy makers need to take more aggressive action. Aside from pushing for a longer period of easy-money policies and more infrastructure investment, the IMF has been urging the Group of 20 largest economies to honour promises for economic overhauls to reignite growth prospects.
We have to counter the triple risk - from a stronger U.S. dollar, higher global interest rates and volatile capital flows. So, it is risk management that continues to exist at the top.

Dr BK Mukhopadhyay,
a Management Economist, is attached to the West Bengal
State University, India.
 [email protected]