China and India to drive global growth

China and India to drive global growth

Paris / London: The Organisation for Economic Co-operation and Development (OECD) raised its growth forecasts for this year and next as emerging economies such as China and India outpace debt-burdened developed countries to drive the global expansion. The Indian economy is forecast to grow 8.3% this year.

The economy of OECD’s 30 members will grow 2.7% this year, more than the 1.9% predicted in November, the Paris-based group said on Wednesday in a report. Including non-members such as China and India, the global economy will expand 4.6% this year and 4.5% in 2011, compared with an average of 3.7% during the decade through 2006.

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The projections highlight a growing divergence in the global economy after it emerged last year from its worst slump in more than half a century.

While the economies of China and India risk overheating, indebtedness may threaten expansion in the developed world, according to OECD, which advises its members on policy.

“A first substantive risk is related to developments in sovereign debt markets," OECD chief economist Pier Carlo Padoan wrote in the report. “Elsewhere, a boom-bust scenario cannot be ruled out, requiring a much stronger tightening of monetary policy in some countries, including China and India."

Europe’s sovereign-debt crisis, triggered by Greece, has raised investor concerns that the economic recovery will fade and sent equity markets around the world tumbling. The MSCI World Index is down 10% this year while the S&P 500 Index in the US has shed 3.7% and the Euro Stoxx 50 Index has dropped 14%.

Still, the US economy will grow 3.2% in 2010 and next year instead of the 2.5% predicted in November, and the euro region will advance 1.2% compared with the previous forecast of 0.9%, OECD said. Japan’s economy will expand 3% instead of 1.8%.

Those rates contrast with a far faster pace of growth in emerging economies. China will expand more than 11% this year and Brazil 6.5%, according to OECD forecasts.

It predicted India’s growth at 8.5% next year. Prime Minister Manmohan Singh had said on Monday that the economy would grow at 8.5% in the fiscal ending 31 March 2011.

The Reserve Bank of India (RBI) has shifted to a tighter monetary stance, having recently raised key policy rates in order to douse inflationary pressures. Inflation for April stood at 9.59%, while food inflation is hovering at over 16%.

In April, RBI hiked repo and reverse repo rates (the rates at which it lends to and borrows short-term funds from banks) by 25 basis points each to 5.25% and 3.75%, respectively. These rates were raised by an identical margin on 19 March.

According to the OECD report, an expected rebound in agriculture should help limit further increases in food prices that have been a major contributor to recent high inflation. However, underlying inflationary pressures are likely to persist given the strong outlook for demand.

“With agricultural output expected to rebound sharply, economic growth should be strong in the near term before moderating to around trend rates," it said.

China’s efforts to stoke domestic demand have helped keep its trade surplus from returning to the record levels registered in 2006 and 2007, before the financial crisis, OECD said.

US-China talks, set up primarily to head off bilateral disputes, focused this week on threats to global stability, including Europe’s debt crisis.

About 200 US officials wrapped up meetings in Beijing two days ago as the euro’s decline to an eight-year low against the yen and a 4.7% plunge versus the won overshadowed sparring on trade, and China’s control of its exchange rate.

The relative weakness of the euro region puts the onus on its policymakers to improve their long-term coordination after agreeing earlier this month on a support package worth almost $1 trillion (Rs47.6 trillion) to help debt-burdened countries such as Greece, Spain and Portugal, OECD said.

The European effort, culminating in a finance ministers’ meeting in Brussels on 9 May, was comparable with that made to shore up banks in Western countries in October 2008.

The fact that the second set of actions has been taken 18 months after the first is a reminder that the period of significant financial instability that began in August 2007 is not yet over, Padoan said. Short-term policy responses are not without long-term consequences. Above all, rising indebtedness and widespread moral hazard will reduce room for policy action, if needed, in future.

OECD said the euro area needs to increase wage and price flexibility, change the investment structures and consider raising retirement ages in order to help bridge divergences between countries.

The organization urged the European Central Bank (ECB), which began buying government bonds for the first time this month, to remain accommodative. ECB’s main policy rate has been held at 1% for more than a year and it should be kept there until late 2010, OECD said.

It also urged the Frankfurt-based central bank to provide a clear road map on the offsetting and the eventual unwinding of long-term asset holdings so as to anchor long-term inflation expectations.

In Germany, the euro region’s biggest economy, the recovery remains intact and growth should pick up strongly as global trade improves and companies boost investment, according to the report.

Germany will expand 1.9% this year and 2.1% in 2011, the report said.

France will expand 1.7% and 2.1% this year and next, while the UK, which neighbours the euro area, will grow 1.3% and 2.5%, it added.

Britain is trailing the two other biggest economies in Europe because of high inflation and the lingering effects from the credit crunch, OECD said.