Stuck in low global growth and India overtaking China – is this the 'new normal'?
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Version 0 of 1. The IMF’s latest world economic outlook released on Wednesday lacks the gloom that has accompanied previous reports. While there is some suggestion that growth in Australia will be a touch lower and unemployment will rise somewhat higher than was expected in October last year, major downward revisions observed in the past six years have, for the moment, stopped. India has now also overtaken China as the fastest growing major economy in the world. The absence of gloom in the April report is partly because the IMF put most of its usual depressing revisions in its January update. It noted then that the drop in oil prices had assisted an increase in growth, but that this was offset by overall declining investment. It thus cut its predictions for world GDP growth in 2015 from 3.9% to 3.5%. The outlook released on Wednesday sees this figure remain unchanged: For Europe, the situation is much improved. While still projecting historically low growth across the area of just 1.45%, this is up from the pathetic 1.2% that the IMF forecast in January. In effect, now the Euro area is expected to grow as strongly (or more accurately, as weakly) as the IMF expected it would this time last year. This better outlook is driven primarily from the improved situation for Germany, France, Spain and Italy – each of which saw their growth projections for growth in 2015 revised up from what they were in January. The big driver of this improved growth comes from lower interest rates that have finally helped spur some investment – especially in Spain and Germany – and also lower oil prices. And while the IMF does seem quite buoyant about Europe, it notes that Germany – which it specially lists as a country with “fiscal space” (i.e. a budget surplus) – “could do more to encourage growth, especially by undertaking much needed public investment”. The drop in oil prices, down around 50% from where they were in June last year has, on balance, improved the growth outlook for developed nations, including Australia. The IMF calculated that if the decline in global oil prices was fully passed through in lower prices, it would alone cause global GDP to rise roughly 1% by 2016. Even if the drop in prices were not fully passed through, and the increase revenue were to be saved, the IMF still projects world GDP would grow by 0.5% more than it otherwise would have. But this does not mean it is all smiles and sunshine here in Australia. For while falling oil prices help our growth, falling iron ore prices do not. The IMF slightly lowered its outlook for Australia’s GDP growth this year from 2.9% to 2.8%. The revision would have been more, but it noted that lower iron ore prices and subsequent lower investment in the resources industry has been “offset by supportive monetary policy and a somewhat weaker exchange rate”. The 2.8% growth forecast for 2015 is the second most pessimistic forecast this year and since the IMF began forecasting out to 2015 in April 2010. By contrast, the 2.7% growth forecast for the UK is the most optimistic the IMF has been for 2015. Similarly, while growth prospects in the US for this year are down a touch on where the IMF thought they might be a few years ago, they remain better than they were this time last year. But the big changes come in the developing world – most notably in China and India. India’s GDP forecast for 2015 has been revised up significantly from 6.4% to 7.5%. And as China’s growth forecast was revised down from 7.1% in October to just 6.8%, it means that for the first time since 1999 India is projected to grow faster than China: And what is more, the IMF expects it to continue to grow faster until 2020. The IMF lauded the economic policies of Narendra Modi’s Indian government, noting that “growth will benefit from recent policy reforms, a consequent pickup in investment, and lower oil prices”. Expect our politicians to start talking more and more about the benefits of India as opposed to China in future years – although it is worth noting in US dollar terms, India’s economy remains only about 20% the size of China’s and it has a lot of catching up to do. Despite the IMF slightly revising down Australia’s GDP growth this year, in 2015 and 2016 it is actually more optimistic than it was in October last year. Rather than predicting GDP growth of 3.0% and 2.9% in 2016 and 2017, it now predicts growth of 3.1% in both years: This year’s slower growth than expected, however, sees the IMF expecting unemployment to rise by more than it did in October. Whereas six months ago it thought our unemployment rate would top out at 6.2% in 2014 and fall to 6.05% this year, it now believes unemployment will rise to 6.4% in 2016: But the stronger growth in 2016 and 2017 will see it fall faster, and the IMF expects that by 2020 the unemployment rate will be back to 5.5% The outlook does, however, see Australia and most of the developed world stuck in the period of lower growth than we were accustomed to prior to the GFC. Of the 34 OECD nations, only four – Denmark, Germany, Mexico, and Portugal – are projected to have stronger growth over the next six years than they did in the six years prior to the GFC: The new normal of weaker growth looks set to continue, as the period of China leading the way comes to an end. The IMF outlook does not provide much joy for a government hoping for a return to strong growth in the short term, but for once the picture does not seem to be getting worse. In the era of the “new normal” that’s about as positive as economic news gets. |