The World Bank’s global economic forecast released recently is altogether upbeat on economic prospects across the world. World economic growth will increase from 2.4 per cent last year to 3.2 per cent in 2014 and would remain at that level for the next two years.
The World Bank’s positive outlook on the world economy is shared by other institutions such as the International Monetary Fund (IMF).
Even its important observation that in 2014 both the advanced economies and the developing ones will drive world economic growth is not new.
For the global economy, in general, and the advanced economies, in particular, the optimism on the global growth story comes after years of recession.
Financial crisis and a weak recovery
However, in a twist to what has been the dominant growth trend in the post-recession period, the developing economies — India, China and others — are no longer spearheading global growth. The leadership role has been taken over by the advanced economies, with the U.S. at the helm.
In 2014, both the developed and the developing economies are poised to grow, with the former providing momentum to the latter.
Within the group of advanced economies, even Europe, battered by recession and weighed down by austerity measures, is showing signs of recovery. The World Bank report points out that the entire European Union, which includes the 18 countries that share the common currency, the euro as well as 11 others, which are outside the monetary union, reported a 1.5 per cent increase in factory output in November.
The Bank expects the U.S. economy to grow by about 2.8 per cent in 2014, up from 1.8 per cent last year. Uncertainty arising from political differences among the two parties over the budget — that shut down the Federal Government — might be less of a problem this year.
Japan has been jolted out of its slump by Abenomics, the aggressive fiscal and monetary stimulus associated with Prime Minister Shinzo Abe.
As for developing countries, the Bank expects them to grow at a relatively modest pace of 5.3 per cent. That would be significantly lower than the heady growth that they enjoyed in the period before the recession.
But though modest, their growth rates might be more sustainable and healthier, driven by improving economic fundamentals rather than by cheap money and financial bubbles.
The U.S. Federal Reserve’s decision to gradually end its massive stimulus programme to reduce interest rates the world over, no doubt, poses significant risks, especially to the developing economies, but these might not be as severe as was feared. In any case, the announcement of a modest tapering has been received calmly by the markets around the world.
The World Bank report has good news for India, and its policy makers. Its economic growth will be the strongest among major developing economies between 2013 and 2016.
Although for 2013, the estimated growth rate will be just 4.8 per cent, the coming years will see a rapid acceleration. By 2016, the Indian economy is expected to grow by 7.1 per cent, a full 2.3 percentage points over the current rate. Such a prognosis has other positive meanings, too. The inevitable comparison with China shows India almost catching up with China. By 2016, the gap between the rates of growth of the two major developing economies would have narrowed down considerably to just 0.4 per cent compared with the 3.1 per cent gap in 2014.
For India, it is a huge plus point to be seen to (almost) draw level with the undoubted leader in the pack of developing economies. But for China, the relative decline from its unprecedented double digit growth is emblematic of the larger trend of the emerging economies falling behind the U.S. and other developed economies. The BRICS grouping that promised so much has been a disappointment at least for the financial markets.
Even discounting the markets hype, a few points emerge. Global economic recovery implies a revival of global demand which is a positive development for all emerging market countries, including India. The projected 7 per cent plus growth rate in the near future might not appear flattering given the high growth rates in India and other emerging economies. But it appears to more sustainable.
A sentence in “World Bank report flattering to India” read: “The World Bank report points out that the entire European Union, which includes the 17 countries that share the common currency,…” It should have been 18 countries as Latvia joined the monetary union recently and subsequent to the WB report.