If the World Bank’s June edition of its report on “Global Economic Prospects” is to be believed, the current slowdown in the world economy, as well as in the Indian economy, is just a soft patch. While global real growth in the gross domestic product (GDP) is expected to slow from 3.8% in 2010 to 3.2% this year, the study forecasts a rebound in 2012 to 3.6% and the same rate of growth to be maintained in 2013.
There are other interesting things forecast for 2012. For example, the price of crude oil is expected to fall both next year and in 2013. The prices of non-oil commodities, too, are expected to fall in 2012 and 2013. In sum, the World Bank is forecasting the best of possible worlds for 2012 and 2013—higher growth, together with lower inflation.
Also see | Commodity Prices Expected To Fall In 2012 (PDF)
Also see | Hitting A Soft Patch (PDF)
There is, though, a twist in the tale. While the real GDP growth in high-income countries is projected to increase to 2.7% in 2012 from 2.2% in 2011, growth among developing countries is projected to decrease slightly from 6.3% this year to 6.2% in 2012. For India, though, the World Bank is optimistic, expecting real GDP growth, on a calendar year basis, to be higher in 2012 than in 2011. That’s in sharp contrast to its forecast for China, whose GDP growth is expected to decelerate in 2012.
For the South Asian region, the study says, “GDP growth (in calendar year terms) in South Asia is projected to gain momentum incrementally in 2012 and 2013 to 7.7% and 7.9%, respectively, from an expected 7.5% in 2011, led by firming private sector activity, as inflationary pressures diminish and enable monetary authorities to pursue less restrictive stances in the outer years. In particular, investment is expected to firm as tighter monetary conditions are projected to contribute to an easing of inflation expectations and as fiscal consolidation fosters greater access to credit. Additionally, large programmed investment and reconstruction projects in Afghanistan, Bangladesh, Bhutan, India and Sri Lanka should support acceleration of GDP growth in the outer years, boosting productivity and potential output.”
It’s likely to get worse before it gets better, though. That’s because the World Bank report says that inflation is likely to accelerate further in many developing regions, including South Asia, not least because capacity utilization is high. The study points out that manufacturing capacity is now close to or above trend levels in East Asia and Pacific, Latin America and South Asia. In these regions, the recovery has entered a new more mature phase, where additional investment in productive capacity will be necessary to sustain growth ahead.
The report recognizes that the Purchasing Managers’ Index survey readings imply a weakening of growth and it says industrial production growth will ease markedly this quarter before reaccelerating in the second half of 2011, on account of reconstruction efforts in Japan and a lift from lower oil prices.
Of course, the report also points to the risks to the baseline scenario, in the form of higher oil prices, higher inflation, higher fiscal deficits and a crisis in Europe. It says, “In this context, pursuing policy normalization is critical and failure to bring public finances and monetary policy into line could undermine growth projections and progress toward South Asia’s urgent development objectives, including an expansion of infrastructure spending and potential output.”
And finally, the World Bank forecasts that net portfolio equity inflows to the South Asian markets in 2011, while lower than in 2010, will still be higher than in 2007. Further, those inflows are projected to increase in 2012 and 2013. If the World Bank’s analysis is correct, then this is the time to start investing in Indian equities, in anticipation of higher growth in 2012.
Graphic by Yogesh Kumar/Mint
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