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Was 2003-07 boom an anomaly?

Was 2003-07 boom an anomaly?
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First Published: Tue, Oct 06 2009. 12 17 AM IST

Updated: Tue, Oct 06 2009. 12 17 AM IST
While the immediate outlook for the economy may be robust, what about the longer term? The short-term forecasts by IMF’s (International Monetary Fund) World Economic Outlook (WEO) have been much discussed.
It’s interesting that while IMF has raised its GDP projections for the world economy by 0.3 percentage point (against its July forecast) and its 2010 outlook by 0.6 percentage point, it has made no changes in its projection for GDP growth in India this year (5.4%), while reducing its forecast for 2010 by 0.1 percentage point to 6.4%. On the other hand, it has raised China’s GDP forecast by 1 percentage point in 2009 to 8.5% and by 50 basis points in 2010 to 9%. Probably, as ABN Amro senior economist Gaurav Kapur points out, it’s the result of the drought, which prevented IMF from raising the short-term forecast for India too.
WEO also says that recovery will be sluggish and that’s reflected in the tepid growth rates for the developed countries, with the US expected to grow at just 1.5% in 2010 and the euro area at 0.3%.
The question is: How long will it take to get back to the go-go years of the previous boom? IMF believes that for India and China, those years may not return, at least not till 2014, the furthest year for which they have made projections.
As the chart shows, IMF projections do not see a return to 9%-plus growth for India even in 2014. Nor does it see a return to the 11% growth rates for China.
Graphics: Ahmed Raza Khan / Mint
On the other hand, countries such as the US and the UK, devastated by the current crisis, are forecast to get back to their pre-2007 growth rates by 2011 and 2012, respectively.
One explanation could be that IMF does not see the kind of bubble in emerging markets that happened during the last boom. There’s little doubt that access to cheap capital from abroad was one of the factors that contributed handsomely to India’s 9%-plus growth rates. Perhaps IMF does not see a recurrence of that.
Interestingly, while several observers are talking of a “new normal”, a lowering of GDP growth in the West for several years and as a consequence a fall in the growth rate of world GDP, the IMF data seems to have a different take on that. While it’s true the WEO database does not envisage a return till 2014 to the 5% world GDP growth rate seen in 2005 and 2006, the reason seems to be lower growth by countries such as China and India. This is decidedly odd.
In short, IMF forecasts probably reflect a resumption of trend growth in India and China, with the growth during the last boom being seen as an aberration and unlikely to return. The consolation, of course, is that IMF revises these forecasts every six months.
Write to us at marktomarket@livemint.com
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First Published: Tue, Oct 06 2009. 12 17 AM IST