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Business News/ Opinion / Global growth: Another year of downgrades?
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Global growth: Another year of downgrades?

A repetition of past downgrade trends as the year unfolds is then a warning that growth drivers need to be found elsewhere

Downward revisions to initial world output forecasts have been in the range of 40-100 basis points over 2011-14. Photo: Mint Premium
Downward revisions to initial world output forecasts have been in the range of 40-100 basis points over 2011-14. Photo: Mint

Global growth projections have systematically been downgraded through each year since 2011. IMF’s world gross domestic product or GDP projections, which are published four quarters in advance, are a case in point. Downward revisions to initial world output forecasts have been in the range of 40-100 basis points over 2011-14. A basis point is a hundredth of a percentage point. A typical pattern characterizes these downgrades—the year unfolds with initially robust predictions but one or another country, or sometimes even a group, wobbles down the year leading to scaling down of global GDP growth. Such being the story of post-crisis global recovery, is 2015 set on similar path? Or will it beat the four-year trend?

The question surfaces as the Organization of Economic Cooperation and Development (OECD), a 34-country club of mostly advanced economies, cut its global growth forecast for this year to 3.1% in the first week of June; in October, it had predicted a 3.7% lift for the global economy. The same day, the European Central Bank (ECB) visualized growth faltering even as it persists with quantitative easing or QE that, among other things, is weakening the euro. While the ECB did so looking at the loss of some growth momentum and bond market volatility that, in its assessment, will persist, the OECD cited lagging investment and risks that include a possible Greek default. The same day, the IMF slashed its US growth projections for 2015 to 2.5% from 3.1% in April, or less than two months ago.

The question arises if the IMF, which publishes its World Economic Outlook update sometime in July, follow suit as well? It needn’t necessarily revise down its current 3.5% growth projection for the world economy as the US economy is largely judged to be strengthening each day—its April trade and jobs data were encouraging, offsetting anxieties that the first-quarter’s exceptional contraction was a one-off. But then, the IMF’s managing director urged the US central bank to wait on raising interest rates—a prospect dreaded by many nurturing the interest of overall world GDP growth—while lowering the projected growth path of the US economy the same day as ECB and OECD sounded their downgrade bugle.

The sum of it all is that a lack of firm growth indications, and the fact that Euro area and Japanese uplifts are more bolstered by QE-weakened currencies than any fundamental sources of growth, continues to affect confidence about the world economy at this point. Considering that global output growth in 2014 was 3.3% (3.4% as per IMF’s April assessment), there is dearth of external demand for all emerging economies. That includes India, which is at present struggling to revive even domestic demand amid very poor monsoon forecast that portends a possible drought. As if to buttress these readings, today’s trade data release shows merchandise exports contracted 20.2% year-on-year in May. This is the sixth consecutive month, or half a year of export growth contraction, a confirmation that India cannot depend upon world demand for sure. A repetition of past downgrade trends as the year unfolds is then a warning that growth drivers need to be found elsewhere.

Renu Kohli is a New Delhi-based macroeconomist.

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Published: 16 Jun 2015, 02:16 PM IST
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