Business
Prospects and risks in the global economy
By
Amit KapoorThree recent reports from different perspectives mention the prospects
of the global economy and the risks that are inherent. These include the
Global Risks Report 2015 of the World Economic Forum (WEF), the January
2015 update of the World Economic Outlook (WEO) of the International
Monetary Fund (IMF) and Global Economic Prospects of the World Bank.
While
the first one deals with the issue of risks from a structural viewpoint
the other two deal with growth and risks from the perspective of their
importance in the global economy, especially from a near to a medium
term timeframe.
The Global Risks Report 2015 addresses risks and
broadly categorizes them into five broad categories: economic,
environmental, geopolitical, societal and technological. Various risks
along these dimensions are then measured on a grid with impact on one
axis and likelihood of occurrence along the other axis.
This
year, risks, which scored high on both the impact and likelihood scale,
included inter-state conflicts, water crises, failure of climate chain
adaptation, unemployment or underemployment, terrorist attacks, cyber
attacks, asset bubbles, food crises and profound social instability.
Over the longer time frame of the coming 18 months, the risks that we
face are going to include inter-state conflicts under geopolitical
risks, profound social instability under societal risks, extreme weather
events under environmental risks, cyber attack under the technological
risk and unemployment and underemployment under the economic risk
categories. The societal and economic risks are particularly pertinent
for South Asia, and particularly India, given that its private and
public sector faces an enormous challenge with respect to providing jobs
to its ever-increasing workforce. Also, the report mentions risks where
regions are the least prepared. In the case of South Asia, the three
biggest risks facing the region are failure of urban planning, terrorist
attacks and water crises.
The January 2015 update of the World
Economic Outlook (WEO) of the International Monetary Fund (IMF) deals
with the projections for the world economy amid collapsing commodity
prices especially that of crude oil. The growth for 2015-16 is projected
at 3.5 percent and 3.7 percent, reflecting a downward revision of 0.3
percent relative to the October 2014 WEO. According to the update, this
was due to "reassessment of prospects in China, Russia, the Euro area,
and Japan as well as weaker activity in some major oil exporters because
of the sharp drop in oil prices". The report also assesses that in
2016, India might just grow at 6.5 percent, outpacing China, which is
expected to slow down to 6.3 percent during the commensurate period.
However, one must take these global growth forecasts with a pinch of
salt as global growth percentages are not reflective of the base effect
at work.
The update has an interesting infographic that mentions
the risks to global growth. It clearly indicates that while there is an
upside risk of lower oil prices, there are downside risks with respect
to smaller investments, market volatility, stagnation in the Euro area
and Japan and geopolitical events - like the turmoil in Ukraine backed
by Russia. It shows that the world economy is still not fully back to
normal, but projections suggest it may be getting back to normal.
The
World Bank's Global Economic Prospects is about the global and regional
outlook of world economies, the risks that underlie economic growth and
the adequate responses policymakers should take in fostering global
growth. It forecasts GDP growth at 3 percent in 2015 and at 3.3 percent
in 2016. This report, like the WEO update, suggests that India might
overtake China in growth percentage terms, but a year later in 2017. An
important section of the report is on the global economy and prospects
and mentions the relatively robust growth in United States and Britain,
while pointing out that this would be further delayed in the Euro area
and Japan. China similarly looks set to continue on a path of "gradual
deceleration". The report also mentions key challenges and opportunities
currently confronting developing countries like the usage of fiscal
policy as a counter-cyclical tool, weaker trade in the post-crisis years
leading to slower growth, causes and implications of cheap oil, and
remittances as a means of steadying consumption amid sudden stops.
The
three reports taken together bring to the fore the challenges and
opportunities inherent in the global economy. The Euro area and the US
will have to focus on the both the monetary and fiscal policies aimed at
reducing risks and fostering growth and innovation. Similarly, Japan
has been pursuing an expansionary economic program aimed at boosting
growth and competitiveness. This will mean that the easy money era is
not completely over with US Federal Reserve ending its massive
bond-buying program. China will have to prepare for a softer landing as
it decelerates further. In the South Asian and African regions, the
focus will have to be shift to reducing supply side bottlenecks,
especially cumbersome bureaucracies, underinvestment in human capital,
and large infrastructure deficits that are seen to be the main reasons
for undermining the competitiveness of these regions. Policies and
actions aimed at reducing these will help boost economic growth not only
in these regions but also in the world at large.
(The article
is co-authored with Sankalp Sharma, Senior Researcher at the Institute
for Competitiveness, India. The views expressed are personal. is Chair,
Institute for Competitiveness & Editor of Thinkers. He can be
reached at [email protected] and tweets @kautiliya)