In addition to resolving trade and tech tensions, countries need to work together to address climate change, corruption, international taxation and cybersecurity
Global growth is currently shaky. According to the latest update by the WEO, IMF, in July the projection of global growth is under revision, moving to 3.2% in 2019 and 3.5% in 2020. The current revision reflects negative surprises for growth in emerging markets and developing economies; most emerging markets like BRICs have 30% of the world GDP and 17% share in the world trade.
Growth is projected to improve between the end of 2019 and 2020. Large increase in such growth closer to about 70% relies on an improvement in growth performance in stressed emerging markets and developing economies. With trade war between the US and China, Iran-US disturbances, high debt-to-GDP, large amounts of NPAs in India and the deadlock at WTO negotiations, emerging markets are not clear about the growth path or the direction of world economy.
Global growth is sluggish, but it may not have been this way, as some of the polices followed are self-inflicting or self-inflicted. Dynamism in the global economy is being weighed down due to prolonged policy uncertainty as trade tensions still rise without showing any signs of abating. The recent meeting of the G20 in Osaka, Japan, couldn’t even foster US-China trade truce. To add, tensions with respect to Huawei are threatening global technology supply chains, and the prospects of a no-deal Brexit have risen.
The negative consequences of policy uncertainty are visible in the diverging trends between the manufacturing and services sectors. Manufacturing investment continues to decline as business sentiment is worsening in spite of having a low interest rate. Disbursement of loan credit has been minimal across the world. Businesses hold off on investment in the face of uncertainty. Global trade growth, which moves closely with investment, slowed to 0.5% (year-on-year) in the first quarter of 2019—its slowest pace since 2012. On the other hand, the services sector is holding up and consumer sentiment is strong, as unemployment rates touch record lows and wage incomes rise in several countries.
In emerging markets and developing economies, growth is being revised down by 0.3 percentage points in 2019 to 4.1%, and by 0.1 percentage points for 2020 to 4.7%. The downward revisions for 2019 are across the board for major economies. In China, the slight revision downwards reflects due to higher tariffs imposed by the US in May 2019, while significant revisions in India and Brazil reflect weaker-than-expected domestic demand, export slowdown and spillover effects of NPAs. Even for commodity exporters, supply disruptions, such as in Russia and Chile, and sanctions on Iran, have led to downward revisions despite a near-term strengthening in oil prices.
Financial conditions in the US and the EU have eased, as the US Fed and the ECB adopted an accommodative monetary policy stance. Emerging markets have benefited from monetary easing in major economies, but have faced volatile risk sentiment tied to trade tensions. Low-income developing countries, which received stable FDI, now receive volatile portfolio flows, as the search for yield in a low-interest rate environment reaches frontier markets. The current downside risk to the world economy emanates from escalation of trade and technology tensions. Earlier high tariff imposition and future scare of tariff hike by the US and China will further trigger reduction in global output by 0.5% in 2020.
To support global growth, world leaders must prescribe to constructive policies such as making monetary policy accommodative especially where inflation is softening below target. But it needs to be accompanied by sound trade policies that would lift the outlook and reduce downside risks. Fiscal policy should balance growth, equity and sustainability concerns, including protecting the society’s most vulnerable. Countries with fiscal space should invest in physical and social infrastructure to raise potential growth. In the event of a severe downturn, a synchronised move towards more accommodative fiscal policies should complement monetary easing, subject to country-specific circumstances.
The need for greater global cooperation is urgent. In addition to resolving trade and technology tensions, countries must work together to address issues such as cybersecurity, corruption, climate change, international taxation, etc.
(The author is professor, LBSIM, Delhi, and former senior faculty, IIFT, Delhi)