The global economy is slowing down. Will it fall further? The International Monetary Fund’s (IMF) new Managing Director, Kristalina Georgieva, warned that the slowdown is posing a “serious risk”. The IMF has downgraded the global GDP growth to 3% for 2019 - the slowest since the global financial crisis of 2008.
World GDP growth slowing down
The IMF’s latest World Economic Report (October 2019) suggests that this subdued growth is the result of rising trade barriers, elevated uncertainty around trade and geopolitics, and idiosyncratic factors causing macroeconomic strain in several emerging market economies. Structural factors, such as low productivity growth, and aging demographics in advanced economies are also affecting macroeconomic stability.
Global GDP growth is projected to pick up to 3.4% in 2020, based primarily on projected improvement in economic performance in emerging markets in Latin America, West Asia, and emerging and developing Europe that are under macroeconomic strain. Alongside this, a projected slowdown in China and in the United States, portends further slowdown in 2020, the IMF cautioned.
The World Bank has appeared even more pessimistic and has downsized the global growth to 2.6% for 2019 - 0.3 percentage point below its previous forecast, reflecting weaker-than-expected international trade and investment. Growth is projected to gradually rise to 2.8% by 2021 with prospects for improved global financing conditions, as well as a modest recovery in emerging market and developing economies.
President Donald Trump’s trade actions will undermine global growth. In his latest threat, the US President announced plans to impose tariffs on Mexican imports if it doesn’t halt a flow of migrants reaching the US border. “Heightened policy uncertainty, including a recent re-escalation of trade tensions between major economies, has been accompanied by a deceleration in global investment and a decline in confidence,” stated the World Bank.
According to UNCTAD’s World Investment Report 2019, global flows of Foreign Direct Investment (FDI) fell by 13% to reach $1.3 trillion last year. This was the lowest since the global financial crisis.
FDI flows to developed economies reached the lowest point since 2004 – down by 27% last year. Inflows to Europe halved to less than $200 billion, due to negative inflows in a few large host countries as a result of funds repatriations and to a sizeable drop in the United Kingdom. Inflows in the United States also declined by 9% to $252 billion.
The trend has continued in the current year as well. According to the OECD, the global FDI flows declined by 20% in the first half of 2019 compared with the second half of 2018. The slowing down of investment and subdued activity, particularly in manufacturing and trade, has led the World Bank to lower further the 2019 global GDP growth projection to 2.4% (World Bank Monthly Report, October 2019).
America’s GDP growth will slow down to 2.2% in 2019 from 3% in 2018. It will be 2% in 2020 and 1.9% in 2021. This is as per the Federal Open Market Committee last September. The projected slowdown in 2019 and beyond is a side effect of the trade war, a key component of Trump’s economic policies.
Seasonally adjusted GDP rose by 0.2% in the Euro area during the second quarter of 2019, compared with the previous quarter, according to estimates by the statistical office of the European Union. In the first quarter, the GDP had grown by 0.4% in the Euro area and by 0.5% in the EU28.
According to the European Central Bank, the real GDP growth in the Euro area fell to 0.2% in the second quarter of 2019, as export growth slowed down sharply. In the first quarter, GDP had grown by 0.4%. But for steady domestic demand, the GDP growth would have been even lower in the second quarter as the net trade contribution turned negative.
The IMF has cut India’s growth projection for 2019 to 6.1% in October from 7% in July, suggesting the government to use monetary policy and broad-based structural reforms to address cyclical weakness and strengthen confidence. China’s growth projection for the current year too was cut to 6.1%.
Effect of US-China trade dispute
The US-China trade conflict has put global growth under pressure. There was a possibility of a breakthrough recently with Beijing signing up to buy more American farm products and the White House suspending another round of tariffs. However, the crucial disputes relating to accusations of intellectual property theft, forced technology transfer, and complaints about Chinese industrial subsidies remained unresolved.
Amid such developments, President Trump threatened higher tariffs on Chinese goods if China did not make a deal on trade. The US has imposed tariffs on about $500 billion in Chinese goods while China has retaliated with tariffs on about $110 billion in American products.
The net result has been negative for both. A new IMF projection shows China’s GDP output falling by 2% in the near term under the current tariff scenario and 1% in the long term, while the US output would decline by 0.6% over time.
The rising trade tensions have led the WTO to sharply downgrade the forecasts for trade growth in 2019 and 2020. World merchandise trade volumes are now expected to rise by only 1.2% in 2019, substantially lower than the 2.6% growth estimated in April. The projected increase in 2020 is now 2.7%, down from 3.0% previously. Many economists caution that downside risks remain high and that the 2020 projection depends on a return to more normal trade relations.
The slowdown reflects a confluence of factors, including a slowdown in investment, the impact of increased trade tensions on spending on capital goods (which are heavily traded), a tech cycle, and a sizeable decline in trade in cars and car parts.
The UNCTAD’s monthly economic indicators suggest worrying prospects about the current and future trajectory of world trade. An index of new export orders derived from purchasing managers’ indices has fallen from 54.0 in January 2018 to 47.5 in August 2019, the weakest reading since October 2012.
The manufacturers have been the biggest victims of the trade dispute; global activity has contracted for five straight months running to September 2019. Of particular concern is the ailing automobile sector -- a headache for the export-heavy German and Japanese economies. Businesses are cutting back, and the US non-residential investment shrank in the second quarter for the first time in three years. The question is: Will the pain at factories infect services, adding another element to the slump?
Lack of demand pulls down India’s GDP growth
India targets a $ 5 trillion economy by 2025. But in view of the global slowdown and its negative impact on the country’s economy, India would probably need to restructure its growth priorities and would need to boost its reform process.
Vindicating IMF’s projection of a lower growth, India’s GDP growth, after slowing down for four successive quarters has slumped to 5% in the first quarter of 2019-20, the lowest in six years. Be it falling automobile sales or rising non-performing assets of banks, sluggish consumer demand, poor export performance or declining manufacturing output; all have a role in this deceleration of growth rate. This is an indication of tough times ahead, the country’s central bank has cautioned in its latest Annual Report.
The RBI feels that the slowdown in April-June GDP growth rate was not an one-off incident but a prelude to further deceleration. The central bank has reduced India’s GDP growth prospect for 2019-20 from 6.9% earlier to 6.1% in its October Monetary Policy.
There are several reasons for projecting a lower growth prospect, from falling global GDP growth to trade tensions between China and the US, but back home the prime villain has been the falling consumption expenditure. This is reflected in sharp fall in the share of private final consumption expenditure in GDP. The share has gone down by one percentage point between the first quarter of 2018-19 and the first quarter of 2019-20. The decline has been very sharp in the last two quarters – down by a huge 3.8 percentage point from 58.9% in the third quarter of 2018-19 to 55.1% in the first quarter of the current year.
This is reflected in the falling consumer confidence index. According to the RBI’s monetary policy of last October, the consumer confidence dropped to a six years low. The
Current Situation Index (CCI) reached 89.4 in the September 2019 round of the survey. In March 2019, the consumer confidence reached 104.6 and crossed the 100 mark for the first time after the December 2016 round. However, this jump was transitory. In the subsequent rounds, the consumer confidence index was on a free fall.
The IMF has reduced India’s GDP growth projection to 6.1% last October from 7% it had forecast in July. While trade tensions between the US and China have hurt the Indian economy, India’s “governance of public sector banks and the efficiency of their credit allocation needs strengthening,” the IMF has suggested.
This is coming at a time when India jumped 14 ranks in the World Bank’s ease of doing business index to 63rd place in 2019 from 77th last year. The rise in ease of doing business index is expected to improve the confidence of both domestic and foreign investors. India needs huge foreign capital to revive its investment climate, so essential to meet its $ 5 trillion economy target.
What is significant is that despite decelerating GDP growth, foreign investors have kept faith in the economy.
This is reflected in the sharp rise in FDI inflows duringApril-June 2019 quarter, when India witnessed one of itsworst GDP growths. FDI equity inflows rose 28% in the quarter from $ 12.75 billion in the first quarter of 2018-19to 16.33 billion now.
Back home, the Finance Minister Nirmala Sitharaman has taken a number of measures to revive the economy. She announced upfront capital infusion of `70,000 crore into public sector banks, a move aimed at boosting lending and improving liquidity situation.
To help the auto sector, the FM has announced that BS IV vehicles bought before March 31, 2020 will remain operational for their full period of registration. Further, she has also deferred the decision to hike the one time registration fee on vehicles till June 2020.
In a major relief to entrepreneurs and start-ups, the FM said that the ‘angel tax’ provision will be withdrawn for start-ups and their investors. Angel tax has been a major issue among entrepreneurs and in the start-up ecosystem.
Addressing the woes of the micro, small and medium enterprises, FM has announced that they will get all their pending GST refunds within 30 days. Further, all GST refunds of MSMEs will be paid within 60 days from the date of application.
Niti Aayog Vice-Chairman Rajiv Kumar has expressed hope that the GDP will grow by 7-7.5% in the second half of 2019-20. If not by such a big number, the global development bodies, too, expect the economy to improve. In fact, the IMF has projected India to grow 7% in 2020.