Should 2014 be better than the year 2013? Indications are there - inflation and interest rates are low in most of the economies, oil prices are expected to fall, companies are sitting on cash, there's plenty of pent-up consumer demand and that a very recent Barclays (BCS) measure of global business confidence reached a 31-month high (in October, 2013).
The reality has been that the world is having trouble accelerating after the 2009 global downturn. The IMF (International Monetary Fund) projects global growth in GDP (Gross Domestic Product) of 3.6 per cent in 2014 - though up from 2.9 per cent this year, yet not back to the 5 per cent growth rates of 2005 to 2007. In fact, the IMF's theme for 2014 ('transitions and tensions') sounds 'anxious'. Â
The IMF, Washington-based fund, has forecast modestly higher global growth for 2014 and 2015 than the 3.0 per cent achieved in 2013. Global economic recovery is too weak for comfort, according to the head of the International Monetary Fund, with the crisis in Ukraine, low euro zone inflation, and emerging market volatility -- all obstacles to growth. Accordingly, the world economy was turning the corner but growth was too low and many problems were brought by the financial crisis - high unemployment, high levels of public debt.
Problems galore! While the world has been watching the escalating crisis in Ukraine, investors and world leaders are looking at how the instability could roil the global economy. Can the reality be denied? Russia is dependent on the international economy in a way that wasn't true 10 years ago - fully one-half of Russia's foreign trade now is with European Union (EU) countries.
Russia depends on European imports to keep its stores filled, to keep the standard of living that Russians have gotten accustomed to. The Russian ruble is already down by about 10 per cent since the start of 2014. The situation in Ukraine could lead investors to reassess the risks of other emerging markets' slow economic growth.
Ukraine doesn't hold the economic power it once did. Ukraine's instability comes at a difficult time for emerging markets worldwide, which are seeing growth slow as the Federal Reserve eases its economic stimulus. Trouble in Ukraine will also hurt Russian banks, which have leant heavily to Ukraine. Russia supplies about 25 per cent of Europe's gas needs and half of that is pumped via pipelines running through Ukraine. Moscow has cut off that flow in past disputes with Kiev and a disruption could push up energy prices for businesses and households.
The impact could be felt beyond Europe if the world's supply of grain is impacted. Ukraine is one of the world's top exporters of corn and wheat, and prices could rise even on concern those exports could halt. The IMF chief warned there could be widespread economic consequences if the situation in Ukraine and other geopolitical tensions were poorly managed, while a further global threat was posed by volatility in emerging markets hit by the reduction in the US Federal Reserve's bond buying programme.
Both China and world economies begin to slow in 2014. What happens in China - the second-largest economy in the world - has and will continue to have a major negative impact on the already slowing emerging markets and a chronically stagnant euro zone. Though the economy recovered in the second half of 2013, China is experiencing rising wages and a worsening exchange rate for its currency (Yuan). Both are raising its manufacturing costs of production and in turn making its exports less competitive. Rising costs of production, could, in turn, be leading to an exodus of global multinational corporations from China, heading for cheaper-cost economies like (e.g. Vietnam, Thailand, Bangladesh and India, among others). In fact, beginning in 2012, the China non-financial economy, including its manufacturing and export sectors, has been showing distinct signs of slowing.
How the US economy responds to the emerging trends is the major point to watch. The fragile US economy now is in its fifth year of below average. 'Stop-Go' economic recovery has been very much in existence - slowing in housing, manufacturing, job creation, auto and other retail sales, and with real family median income in decline and the real likelihood of further spikes in food and gasoline prices in the months immediately ahead!
Then what about India? In spite of the fact that the Indian economy has not been registering a commendable performance of late, who can deny the latent potentialities! India is now a US$ 2.0 trillion economy. Even if the growth rate has slipped to a decade's low of 5.0 per cent, the Indian economy continues to grow. India's key inflation rate has dropped to nine-month low of 4.68 per cent in February 2014; it is also a fact that infrastructure sector is facing a slowdown. More than half of the infra projects are biting dust due to regulatory hurdles like delay in approvals and problems related to land acquisition. Bottlenecks in resource management, financial inclusion are also no less. Are the subsidies reaching the targeted groups in full?
It is good that the G20 countries had already recognised that the right policy actions by countries, as well as cooperation across governments, could raise world GDP by 2.0 per cent over the next five years. The IMF chief is quite right in stating that unless economies come together to take the right kind of policy measures, we could be facing years of slow and sub-par growth - well below the solid, sustainable growth that is needed to create enough jobs and improve living standards into the future. "Brave action" is needed to increase international cooperation and reform labour markets in some countries - all vital to securing a lasting recovery. Any prolonged period of low inflation can suppress demand and output - and suppress growth and jobs. Monetary easing, including through unconventional measures, is needed at this juncture, especially in the euro area to raise the prospects for achieving the ECB's price stability objective of the European Central Bank (ECB).
Dr. B K Mukhopadhyay is a management economist             and Principal, International Institute of Management Sciences, Kolkata. m.bibhas@gmail.com
Signs of stability still a far cry!
B K Mukhopadhyay from Kolkata | Published: April 19, 2014 00:00:00 | Updated: November 30, 2024 06:01:00
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