Is the air of optimism that seems to permeate the global economic outlook justified? Leading commentators around the world are more optimistic at the start of the New Year than they have ever been since the global recession of 2008. Even conceding that a certain amount of cheer and expressions of glad tidings are common on every new year’s eve, the year 2014 seems exceptional — in the opinion of many experts, things look much better than they did in the recent past.
A few points are relevant here. The positive view of the world economy is mostly confined to the U.S. and other developed countries but, emerging market countries are not doing too badly either. But in a significant change, it is the advanced countries and not the emerging market economies that are in the forefront of global recovery. Earlier, the developed economies were trailing the emerging market economies in what the IMF likes to call, a multi-paced recovery of the world economy.
In popular discussions such as this, most experts tend to equate the advanced economies with the U.S. and to a lesser extent the European Union (EU) and Japan. Discussions on emerging market economies are invariably confined to China.
India out of sight
At this juncture, India seems to have dropped out of sight. Slowing economic growth amidst well-entrenched inflation is surely responsible. While the attainment of a gross domestic product (GDP) growth of just above 5 per cent for the current year 2013-14 would appear to be creditable, not so long ago India could boast of much higher growth rates. Being included in BRICS and other groupings would suggest that India’s potential was recognised. That was then. One might have to wait until after the elections and many concrete examples of robust reforms and governance to “re-rate” India as it were.
It may be argued that a 5 per cent annual growth rate, while being sub-optimal for India, compares favourably with the growth rates of many other countries, both developed and developing. Yet, the perception of India is rooted in the belief that it lags behind in economic reforms, and, more relevantly, in terms of various social indices such as health, education and sanitation. A very different illustration of subjectivity is in the ways the opinions on the Europe have changed. Not long ago, the crisis-hit countries were forced to adopt a socially disruptive austerity package. If Europe has bounced back (in the experts’ opinions), it is simply because they have not broken up and are staying together.
U.S. the growth engine
A very important speech on the current global economy was delivered by the outgoing chairman of the U.S. Federal Reserve, Ben Bernanke. At a recent policy speech in the U.S., which most people think will be his last before he leaves office later this month, he said there were grounds for “cautious optimism” for both advanced and emerging economies around the world. The U.S. is clearly driving the global economy with a better-than-expected growth rate in the last quarter. Its stock markets are buoyant. The S&P index is at a record high, after rising 30 per cent in 2013, the biggest annual gain in almost two decades. Higher consumption by U.S. households will drive demand for these products from across the world.
Yet, Mr. Bernanke, in whose tenure the Fed embarked on a massive and unprecedented quantitative easing (QE) to spur economic revival in the U.S., feels that the U.S. economy needs to traverse some more ground. For instance, unemployment still remains at 7 per cent. However, the threats from the effects of the financial crisis, the woes of the housing market, low productivity growth, the eurozone crisis and the fiscal dysfunction in the U.S. seem to be receding. Improved economic circumstances have induced the Fed to reduce or taper the asset purchase programme.
According to Mr. Bernanke, reforms in the U.K. and Japan are still in their early stages, but all indications point to better growth prospects. Emerging market economies too have grown more quickly in the second-half of 2013, after slowing down in the first-half. The Fed Chairman’s ‘signing-off’ speech is generally upbeat on the world economy, which is, however, moving on different engines.