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IMF: India to Take Growth Lead

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IMF: India to Take Growth Lead

The debate over whether India is the “next China” will continue, but for now the robust growth is welcome.

IMF: India to Take Growth Lead
Credit: Mumbai, India via

The International Monetary Fund has joined the World Bank in downgrading its global growth forecasts, citing “persistent negative forces.” And on the same day China posted its slowest growth since 1990, the IMF said India would overtake its Asian competitor as the fastest growing major economy next year.

Releasing its latest forecasts Tuesday, the Washington-based lender said the world economy would expand by 3.5 percent this year and 3.7 percent in 2016, up from an estimated 3.3 percent in 2014 but both down 0.3 percentage point from its October “World Economic Outlook” report.

The prediction followed the World Bank’s decision last week to downgrade its forecast for global growth to 3 percent this year on the back of sluggish recoveries in the Eurozone and Japan.

While the rapid fall in the oil price has aided global growth along with the depreciation of the euro and Japanese yen, the IMF said these positives had been outweighed by the “lingering legacies” of the global financial crisis and lower potential growth in many nations.

“At the country level, the cross currents make for a complicated picture,” IMF economic counselor and research director Olivier Blanchard said in a statement.

“It means good news for oil importers, bad news for oil exporters. Good news for commodity importers, bad news for exporters. Continuing struggles for the countries which show scars of the crisis, and not so for others. Good news for countries more linked to the euro and the yen, bad news for those more linked to the dollar.”

Similar to the World Bank, the IMF noted an increasing divergence in advanced economies between the solid growth shown by the United States, and the softer Eurozone and Japanese economies.

While advanced economies are expected to post 2.4 percent growth both this year and next, the United States is set to lead the way with a 3.6 percent rise in 2015 and 3.3 percent next year, reflecting “robust private domestic demand,” cheap oil and accommodative monetary policy. In contrast, the Eurozone’s growth outlook was revised down to 1.2 percent this year and 1.4 percent in 2016, reflecting weaker investment.

For Japan, the world’s third-biggest economy, the IMF cut its projections to an estimated 0.6 percent expansion this year, rising only slightly to 0.8 percent in 2016 – both lower than the World Bank’s forecasts.

“Policy responses — additional quantitative and qualitative monetary easing and the delay in the second consumption tax rate increase — are assumed to support a gradual rebound in activity and, together with the oil price boost and yen depreciation, are expected to strengthen growth to above trend in 2015–16 [in Japan],” the fund said.

For emerging market and developing economies, the IMF projected 4.3 percent growth this year and 4.7 percent in 2016, both down on its October forecasts due to slower growth in China and Russia and the impact of weaker commodity prices on exporters.

China Slowdown

The fund said China would slow from an estimated 7.4 percent growth in 2014 to 6.8 percent this year and 6.3 percent in 2016, both down on its previous forecasts for the world’s second-biggest economy and below the World Bank’s predictions.

“Investment growth in China declined in the third quarter of 2014, and leading indicators point to a further slowdown. The authorities are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth and hence the forecast assumes less of a policy response to the underlying moderation,” the IMF said.

While investment bank UBS also predicts 6.8 percent GDP growth for China in 2015, Oxford Economics has forecast 6.5 percent, indicating that this could be the last year the communist giant’s growth rate exceeds 6 percent.

On Tuesday, China announced that its gross domestic product (GDP) expanded by 7.3 percent in the fourth quarter from a year earlier, which despite being above expectations of 7.2 percent growth marked its slowest pace in more than 20 years. It was also the first time since 1998 that Beijing had missed its official growth target, which was 7.5 percent for the full year.

While the IMF’s downward revisions to China’s growth weakened the outlook for emerging Asia, it left India’s projections virtually unchanged at 5.8 percent GDP growth in 2014, rising to 6.3 percent this year. According to the fund, weaker external demand for India will be offset by cheaper oil and a “pickup in industrial and investment activity after policy reforms.”

In a sign of how Asia’s power balance may be shifting, the fund said India would post growth of 6.5 percent in 2016, eclipsing China’s projected 6.3 percent rise, reflecting its confidence in Indian Prime Minister Narendra Modi’s policies.

For the ASEAN-5 of Indonesia, Malaysia, the Philippines, Thailand and Vietnam, the IMF cut its projections to GDP growth of 5.2 percent in 2015 and 5.3 percent next year, reflecting the weaker Chinese economy, although still an improvement on the 4.5 percent gain estimated for last year.

However, the fund noted the risk to its projections of adverse shifts in sentiment and volatility in global financial markets, particularly in emerging markets.

“Potential triggers could be surprises in activity in major economies or surprises in the path of monetary policy normalization in the United States in the context of a continued uneven global expansion,” it said, warning emerging markets faced the risk of capital flight.

Geopolitical risks are also seen remaining high, “although related risks of global oil market disruptions have been downgraded in view of ample net flow supply,” it said.

The IMF urged policymakers in advanced economies to maintain accommodative monetary policy and consider increased infrastructure investment, while lower oil prices “offer an opportunity to reform energy subsidies and taxes in both oil exporters and importers.”

While expanding from a smaller base – India’s economy was estimated at around $2 trillion in 2013, compared to China’s $9.5 trillion – the fund’s latest forecasts add to the debate over whether the emerging South Asian power can become the “next China,” helped by its superior demographics. For the rest of the region though, India’s re-emergence may have come at exactly the right time.