The International Monetary Fund’s (IMF) World Economic Outlook

• The International Monetary Fund’s (IMF) World Economic Outlook (April 2016) tells us that the world economy will grow at 3.2 per cent in purchasing power parity terms in 2016, not 3.6 per cent as forecast last October.
• In 2017, it will grow at 3.5 per cent, not 3.8 per cent as forecast earlier. Contrast these with growth of 4.2 per cent in 1998-2007, the period before the financial crisis.
• Investment has dropped because of slower population growth in the advanced world, people needing fewer things, and modern investment being less capital intensive than in the past.
• Like population growth, productivity growth too has fallen in recent years
• The world suffers from an overhang of excess debt, which is what led to the financial crisis. Economies take years to come out of such an overhang.

Analysis:

• Falling oil prices have failed to provide a shot in the arm for the world economy. Oil prices fell by nearly half in 2015 compared to 2014 but this hasn’t helped. As revenues have fallen, oil exporters have cut their expenditure and this has depressed global demand. In emerging markets such as India, the fall in oil price hasn’t been passed on fully to consumers. In advanced economies, consumers are still weighed down by the heavy debt they accumulated in the pre-crisis period, so they are in no mood to step up spending.
• Falling oil prices have led to large cuts in capital expenditure in the oil and mining sectors. These cuts have had their own impact on non-energy sectors. A fall in oil prices translates into a fall in the inflation rate. Central banks should have cut their policy rates in response.India saw this happened when RBI lower down its rate in monetary policy. But developed world already have their rates near zero, so they are not able to get benefit out from this situation.
• Two aspects of the global economy today are worrisome. First, in periods of weak growth, financial markets are prone to bouts of turbulence. Nervous investors tend to dump risky assets at the merest hint of trouble. If financial markets sink, even the IMF’s modest forecasts can be undermined. Emerging markets especially can be wrecked by sudden and large capital outflows. Second, geopolitical risks have risen sharply. The World Economic Outlook mentions some of these: the humanitarian disaster and the influx of refugees into Europe; the possibility of the U.K. exiting the European Union; the rise of protectionist tendencies in the U.S. and elsewhere; and internal strife in several emerging markets. However, it omits a far more important development: the heightened tensions between Russia and the West. When geopolitical risks rise, investors tend to retreat.
• In order to solve this crisis, one can take possible steps in the form of : Loose monetary policies; Fiscal support and Structural reforms.
• Currently , central banks in Europe as well as in Japan have moved policy rates into negative territory, which means banks charging depositors for keeping cash in banks and paying borrowers for taking loans. However, as depositors have little incentive to put money into banks, banks end up passing on negative rates to borrowers but not to depositors. This undermines banks’ profits at a time when banks in the Eurozone are not in great shape. negative interest rates may lead not to a surge in productive investment but to asset bubbles and another financial crisis.
• Fiscal policies such as government spending on infrastructure or tax incentives to promote a higher minimum wage. Governments are, however, unwilling or unable to boost spending.
• Structural reforms includes things like cutting unemployment benefits, making it easier to hire and fire, reducing barriers to entry, etc. But many of these measures yield benefits only over a long period.

By: Vishal