The International Monetary Fund’s (IMF) World Economic Outlook (WEO) for 2011 has just been released and its database contains a wealth of information on the global economy. Here are a few nuggets from that treasure trove.
What is India’s sustainable rate of gross domestic product (GDP) growth? We all know the Indian economy has a tendency to overheat whenever it crosses the 9% growth mark, despite brave talk of achieving double-digit growth by our political leaders. Wages start to rise, the infrastructure—ramshackle at best—starts to groan, bottlenecks form and inflation shoots up. So what does IMF think is a sustainable growth rate for India?
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The WEO database has forecasts for India’s GDP growth right up to 2016. After a sizzling 10.4% growth rate in 2010, GDP growth is forecast to fall to 8.2% this year and further to 7.8% in 2012. Thereafter, the projections are: 8.2% in 2013 and 8.1% in 2014, 2015 and 2016. The projections beyond 2013 are in the realm of speculation, of course. But the numbers do suggest IMF believes that 8.1% growth is the sustainable number for India.
Using the same logic, IMF thinks the sustainable GDP growth rate for China at 9.5%, which is the forecast for every year from 2012 to 2016. That’s not much of a slowdown. Clearly, IMF believes China’s stated intention of slowing its economy to an annual growth rate of 7% in its 12th Five Year Plan (2011-15) is hot air.
What rate of inflation in India is compatible with the 8% growth rate? IMF predicts average consumer prices of around 4% for 2014-2016. For China, the 9.5% growth rate comes with consumer price inflation of 2%.
It’s interesting, though, that IMF believes that despite the moderation in growth, the savings rate can only go up in India. While savings were 34.7% of GDP, according to IMF, in 2010, they are projected to rise steadily every year, going up to 43.2% in 2016. The investment rate, too, is projected to increase from 37.9% last year to 44.8% by 2016.
In contrast, IMF predicts China’s savings rate will come down a wee bit, from 54% in 2010 to 52.3% in 2016. The drop in the investment rate is projected to be larger, from 48.8% to 44.5%. Of course, much of this is just conjecture, but it underlines the fact that China has to rebalance its lopsided economy by cutting down on investment and by boosting consumption demand instead.
On the other hand, India has to do exactly the opposite, increasing the share of investment in GDP. Notice that IMF is predicting that India’s investment rate, as a percentage of its GDP, will be higher than China’s by 2016. That is a prediction with huge implications for the country, removing one of the constraints to higher growth.
For developed countries, the question is when they will rebound fully from the crisis. For the US, IMF expects GDP growth to be around 2.7-2.8% till 2016. But the output gap, or the gap between actual and potential output, is expected to be a largish 1.4% of potential GDP as far ahead as 2015, though it will get lower every year. For perspective, the US economy had an output gap of 1.5% of potential GDP during the dotcom bust, it had no gap at all during 2005-07 and a record gap of 6% in 2009.
Unemployment, another indication of idle resources, will ease slowly, going down steadily from 8.5% this year to 7% by 2013. Interestingly, the numbers show that the German economy, unlike most of the other developed economies, will operate at full capacity by 2013, with its output gap completely closed.
Let’s move on to capital flows, a topic dear to the heart of every emerging market investor. Unfortunately, IMF feels the huge portfolio inflows of 2010 to the countries of developing Asia are unlikely to be repeated either this year or the next. Net private portfolio inflows in 2011 are projected at $66 billion, well below 2010’s $83 billion and the figure for 2012 is $69 billion.
The good news is that the projected figures for 2011 and 2012 are around the same level as in 2007, a bumper year for fund flows to emerging markets. Also interesting is the IMF’s belief that net foreign direct investment to developing Asian countries in 2011 and 2012 will be lower than in 2010.
What’s the bad news? The bad news is that the IMF’s numbers on inflows need to be taken with a large dose of salt. For instance, in its October 2010 WEO database, it predicted net private portfolio inflows of $24 billion in 2010 and $18 billion for 2011 to developing Asian countries. In its April 2011 database, that’s changed to $83 billion for 2010 and $66 billion for 2011. For direct investment to developing Asia, IMF had projected net inflows of $73 billion for 2010. That figure has been revised up to $175 billion in its April 2011 database.
But then, flows are notoriously fickle. Thankfully, the numbers for GDP and prices haven’t changed much.
Manas Chakravarty looks at trends and issues in the financial markets. Comment at email@example.com