This week saw the release of two reports by the International Monetary Fund (IMF)—its ‘World Economic Outlook’ and the ‘Global Financial Stability Report’. The latter contains IMF’s latest estimate of the extent of losses from the credit crisis and it’s not a pretty picture.
The IMF now says that the losses arising out of the credit crisis will be close to $1 trillion (Rs40 trillion), an estimate that not so long ago used to be on the fringes of mainstream analyses.
The report says that it estimates losses on loans and securities to be $945 billion, with banks shouldering around half of them and the rest divided among insurance companies, pension funds, money market funds, hedge funds and other institutional investors.
What will be the impact of these huge losses? The ‘World Economic Outlook’ says that global gross domestic product (GDP) growth will be 3.7% in 2008, half a percentage point lower than its last estimate and considerably lower than the 4.9% growth notched up last year. The year 2009 is likely to be no better.
For the US, growth is forecast to fall from 2.2% last year to 0.5% this year and 0.6% in 2009. For India, the IMF estimates GDP growth of 7.9% this year and 8% in 2009, higher than a lot of economists’ estimates. For China, growth is estimated to fall from 11.4% last year to 9.3% in 2008 and 9.5% in 2009. In other words, as the report puts it, there’s divergence between the developed and developing world, but no decoupling.
The problem is that this is just the baseline scenario. Under a “shock” scenario, the pain gets much worse, with the US economy contracting 0.74% this year and a further 1.81% next year. While there aren’t detailed data for India and China under the “shock” situation, growth in the “Rest of the World” (ie. apart from the US and the euro area) is expected to go down from 6.47% in 2007 to 4.53% this year and to 4.18% in 2009, which shaves off 0.8 percentage points in 2008 and 1.3 percentage points in 2009 from the baseline scenario.
How do the IMF’s baseline projections compare with previous recessions? Not badly at all—during the last global downturn, after the dotcom bust, global GDP growth was 2.2% in 2001 and 2.8% in 2002. So, if the baseline 3.7% growth holds true, world growth will actually be far more robust than during the previous downturn. And the slowdown in the early 1990s was even worse, with world GDP growth at 1.5% in 1991 and 2% in both 1992 and 1993.
Despite all the talk about the current crisis being the worst since the Great Depression or at least the worst since World War II, the IMF seems to believe it’s just a rather common sort of slowdown.
As for India, the 7.9% growth rate projected this year is much higher than our growth rates during the early years of the decade—during the worst year of the last downturn, GDP growth had slumped to 3.8%.
For China too, the projected slowdown in growth is nothing much to write home about, when placed in the context of its recent history. While the IMF is predicting Chinese growth to be 9.3% this year, it was 7.6% in 1999, 8.4% in 2000 and 8.3% in 2001.
So, is this a clear case of emerging markets diverging from the developed countries? Not really, because the same trend of growth being higher than during the previous downturn is seen in the euro area as well—while the IMF prediction is that the GDP growth will fall to 1.2% next year for the region, growth had been much lower in 2002 and 2003, at 0.9% and 0.8%, respectively. Ditto for Japan—the IMF predicts growth of 1.4% this year, while it had dropped to 0.18% in 2001.
But if the current downturn for the world as a whole is likely to be shallower than the dotcom bust, why do we have all the cries of doom and gloom?
The reason is that the situation is truly dire for the US. The IMF’s baseline case predicts US GDP growth to be 0.5% in 2008 and 0.6% next year.
But during the last US recession in 2001, US economic growth was 0.75%, which improved to 1.6% in 2002. So, the depth of the downturn this time in the US will be worse than in 2001, according to the IMF.
In fact, the last time US GDP growth was worse than 0.5% was in 1991, when the economy contracted by 0.17%. There are a few other economies which too are likely to be affected more than during the 2000-2003 slowdown. One of them is the UK—while the IMF projection for 2008 is 1.6%, GDP growth had been 2.1% in 2002, the worst year of the last downturn.
Spain is another country that has been affected badly and the common thread running through the US, the UK and Spanish economies is that they’ve all had housing bubbles that are now bursting.
If the IMF projections are on the ball, they build a powerful argument for fund flows to countries other than the US or the UK. It also explains why markets have not fallen as much as they did during 2000-03 and holds out hope that they will bounce back sooner. But then, it’s important to remember that only six months ago, the IMF was forecasting world growth at 4.75%, a full percentage point higher than its current projections.
Mint’s resident market expert Manas Chakravarty looks at trends and issues related to investing in general and Indian bourses in particular. Your comments are welcome at firstname.lastname@example.org.