The International Monetary Fund (IMF) has just released its bi-annual update to its flagship publication the World Economic Outlook (WEO). Having the sub-title “Adjusting to Lower Commodity Prices” the report is both provocative as well as portentous. Provocative because it raises some fundamental questions on the assumptions that have guided policy makers around the world recently. It is portentous because the scepticism over recent policy assumptions will lead to a different way of looking at the global economy, its strength and weaknesses.
The key question is whether the steady decline in commodity prices around the world has been an unmixed blessing it has been claimed to be?
For us In India,that question would appear most inappropriate,After all ,one of the tangible benefits of the global decline in oil prices has had a visible impact on day to day living .Much lower global prices have lowered personal transportation costs and improved the prospects of the automobile sector.
At the macro level low commodity prices are responsible for the lower inflation and dramatic improvement in the current account of the balance of payments,Such gains are tangible and though not the only reasons are directly behind the improvement in the economic outlook,
However,,falling commodity prices are an ominous development for the global economy ,more a double-edged weapon than an unmixed blessing. even for India,The IMF explains why.
Declining commodity prices have been considered to be beneficial because they have occurred in tandem with other positives such as the rolling back of global liquidity,increase in supply of commodities and certain other developments.
Current thinking is however radically different .Commodity prices are low because demand is sluggish,Almost all countries both emerging and developed ones are witnessing lower growth ,if at all.China is definitely slowing Europe is stumbling from one crisis to another and Japan is witnessing insignificant growth despite all out efforts by its government to stimulate the economy.Among the advanced economies only the US economy appears to be firmly on the mend after the 2008 global financial crisis,Even their recovery and a fall in unemployment have not been as robust as was anticipated by the monetary authorities.
Emerging market economies have had an uneven ride since the 2008 crisis.In the initial recovery phase, these economies displayed resilence.With China leading the way and India not doing too badly either ,the IMF and other world bodies could describe them them as growth engines compensating for the slack in the advanced economies.
The situation has changed.
.Nearly all the developing countries who are dependent on commodities are now in doldrums. Falling commodity prices have hurt both importers and exporters of commodiies..Brazil,South Africa and Russia ,all big exporters of commodities have been hit badly Their exchange rates have come under pressure reacting to lower export realisations from traditional commodities.
The IMF records the fact that for the fifth year in a row the emerging economies put together are in line to post lower growth rate than the previous year.
As for the global economy,the IMF’s projection at 3.1 percent for the current year indicates slower growth than last year and a significant 0.4 percentage points lower than its April forecast.A mild recovery of sorts is indicated for 2016 .Even here the anticipated 3.6 percent
growth rate is lower than the corresponding April forecast.Significantly the update lists a number of downside risks to these projections.
The important message is that the low global demand is the prime reason for low commodity prices.Unless there is a marked revival in demand commodity prices will remain low,This also explains why a highly sensitive commodity like petroleum has not reacted to the worsening d geopolitical situation in the oil producing region.
The slowdown in China,by far the biggest consumer of commodities has been well documented Its economy is projected to grow by 6.8 percent this year ,lower by 0.5 percentage points last year .It will decelerate further by a similar margin next year.
India stands out in this bleak scenario with a growth projection of 7.3 percent in 2015 ,the same as last year and 7.5 percent in 2016.India overtaking China in a few years has been hyped but can be very misleading.It is going to take many more years of rapid growth to come anywhere near where China,is at the moment.
In fact it might lead to complacency and prevent the implementation of much needed reforms..
The IMF’s October update makes out a case for structural,productivity enhancing reforms.Tthe scope for further conventional monetary and fiscal measures is limited.
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