Bad news for the world economy

In: Uncategorized

12 Feb 2013

Some seriously bad news broke last week yet it received a tiny fraction of the attention the British media devoted to horsemeat.

It looks like Indian economic growth is slowing down. This trend has serious implications not only for India’s population of 1.2 billion but for the entire world economy.

According to figures from the International Monetary Fund (IMF) India’s growth rate fell to 6.5% in 2011/12 and it is expected to drop to 5.4% in 2012/13. These figures are high compared with the developed economies but India’s growth averaged 8.3% a year from 2004-11. It even managed to power ahead in the midst of a global economic crisis.

India’s rapid growth of recent years gave rise to speculation about whether it would at some point eclipse China’s spectacular economic success. It also helped bolster the popularity of emerging market investment.

It is a little early to be certain why the fall has occurred and whether it may prove an unfortunate blip. The IMF put most of the blame on falling investment by corporations and in infrastructure. However, it acknowledged that a decline in exports played a role.

The Indian government says it is confident that if the right policies are implemented the country could return to an 8% growth path. P Chidambaram, the finance minister, was reported as saying that a slow upturn has already begun.

To understand the significance of India’s growth dip it is necessary to put it into a broader context.

The importance of economic growth to India itself should be obvious. India is still a desperately poor country with an average income per head less than a ninth of that in Britain (adjusted for purchasing power). India’s poverty rate – defined by the meagre definition of living on less than $1.25 a day – was 26% in 2008 according to a recent report from the United Nations.

But the world economy, including the advanced economies, has also become heavily dependent on growth in the developed world. While growth in the West has stagnated since 2008 the emerging economies have generally performed well. For instance, the recent World Economic Outlook update from the IMF showed the advanced economies growing by 1.3% in 2012 compared with 5.1% for the emerging and developing economies.

The positive scenario assumes that emerging Asia in particular had successfully “decoupled” from the West. Asia should continue to grow despite sluggish growth in the developed economies.

The most upbeat predictions see the West recovering and therefore narrowing the gap with growth rates in the developing world. A degree of convergence is expected to occur although most see poorer countries still growing more strongly as they are in a “catch up” phase of development.

However, the recent Indian figures have raised the spectre of convergence happening in the opposite direction. Rather than the West returning to stronger growth the emerging economies could be slowing down. In other words there could be a levelling down of growth in the global economy rather than a levelling up.

It would be premature to say the negative scenario is certain on the basis of a couple of years of relatively bad data from India. But it is a topic that merits far more thorough examination than most of the stories topping the news.

This blog post first appeared yesterday on Fundweb.