The World Bank?s latest Global Economic Prospects report forecasts a moderation of global growth to 3.3% in 2008. This would not only be the lowest figure in five years, a deconstruction spells particularly bad news for the world?s rich economies, the growth of which is expected to decelerate for the second consecutive year?to 2.2%. Emerging economies are also expected to slow down, but to a 7.1% clip, which would still be enviable by world standards even if it?s the lowest rate in three years. As with all slowdowns caused by factors beyond just the cyclical, however, uncertainty levels are high this time round. This means a lower confidence that the scenario will pan out exactly as forecast. In fact, there exist several downside risks that may jeopardise prospects for a soft landing for the global economy. Mitigating these should be the focus for policymakers everywhere.
While some of the risks are directly related to domestic policies in developing countries, others are dependent on developments in the US economy, which is at the centre of the swirl. The domestic danger lies in any monetary (since fiscal is less likely) overstimulation of the economy to cushion the impact of global turmoil. A liquidity spurt could create bubbles of investment and other assets in much the same manner as the US did half a decade ago, and with fewer prophylactics against their inevitable bursting. Countries like India would have to be doubly careful, given their export sector worries that could provoke an overreaction to a US recession. Remember, the impact of the other downside risk of a weaker dollar would be mixed, not just negative. It will hurt dollar-price elastic exports and devalue dollar-denominated assets such as forex reserves, but cheaper input imports will beget gains from supply-chain globalisation, even as dollar debt burdens ease and M&A prospects improve. The desired economic stimulation, therefore, is best left to non-standard factors. India is expected to grow at 8.4%, and this can best be achieved through rapid diversification of economic engagements. If the EU, which accounts for a fifth of Indian exports, sees its growth slip to 2.1% as the report projects, peak levels of growth in the Middle East and Africa can possibly compensate. The Asia-Pacific region and Central Asia will also see only a mild slowdown. In sum, be proactive.
