It is tempting to read sunny conclusions in the new update by the International Monetary Fund (IMF) to its biannual World Economic Outlook. But there are still many reasons to be guarded about the prospects of the world economy.
To be sure, the cautious optimism of the Wednesday update is in contrast to the glum tone of the earlier IMF updates this year, when global trade, output and asset prices were collapsing. Unprecedented fiscal and monetary expansion by most governments and central banks pulled the world economy back from the brink of 1930s-style disintegration.
Illustration: Jayachandran / Mint
The worst has been averted. But the recovery is likely to be sluggish. “The good news is that the forces pulling the economy down are decreasing in intensity,” IMF chief economist Olivier Blanchard said when he released the updated analysis of the world economy. “The bad news is that the forces pulling the economy up are still weak. The balance is slowly shifting, and this leads us to predict that while the world economy is still in recession, the recovery is coming. But it is likely to be a weak recovery.”
Even India’s own strong growth, relative to the rest of the world, may not sustain unless the world economy bounces back smartly. The higher-than-expected growth that India and China have reported in 2009 is because of large fiscal stimulus packages and a quick turnaround in capital flows. It will be worth watching whether the governments of these two countries will be able to keep spending to boost domestic demand and whether capital keeps flowing into their financial systems; this is especially true of India rather than China.
But there are some signs of hope globally. High frequency data such as industrial output and various purchasing managers’ indices suggest that economies are bottoming out; low inflation risks mean that monetary and fiscal expansion can continue for some time; the financial markets seem to have moved beyond the panic after the collapse of Lehman Brothers in September; volatilities as well as parameters such as the spread between the London interbank offered rate and overnight index swaps have come down; tail risks of another Lehman-like collapse seem more unlikely now.
But the battle ahead is still a long one. Remember: IMF defines a global recession as global economic growth of below 3%. Its estimate that the global economy will grow at 2.5% in 2010 actually means that the next year will also be one of recession.
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