The January 2019 edition of World Economic Outlook Report by IMF and the Global Economic Prospects 2019 of World Bank have projected a possible slowdown and increased uncertainty in the global economic growth. The increased trade wars between the USA and China, declining productivity in advanced economies and China’s slow growth rate are posing threat to global economic growth and instability. The World Economic Outlook of IMF projected a fall in global growth from 3.9 percent in 2018 to 3.5 percent in 2019, and 3.6 percent in 2020 which is much lower than the projected rate in October. The past two quarters of the year 2018 witnessed trade wars between the USA and China. They have consequently increased oil prices and the overall stagnation in production outside USA. They have also resulted in the weakening of exports and imports.
The global financial scenario is hinting towards severe tightening, starting with the hike in the interest rate by most of the dominant economies with the US Fed Reserve to hike the rates, only to lower the liquidity in the economy, reducing business activities. Coupled with the stagnant economic activities, is the low productivity of factors of production, especially in the advanced economies. Additionally, there are problems of capital inflows and exchange rate fluctuations. Rising political turmoil and food inflation are other challenges to the world growth scenario. Even after years of planning and efforts undertaken, poverty and inequality are prevailing in the globe, with the developing and third world economies facing great social and environmental pressures and concerns.
One of the major reasons pointed out for the global slowdown is the slow paced momentum of financial investments and sentiments. The financial markets with fluctuating index points and reduced global demand has negatively impacted the investor sentiments. Increased uncertainty of stock exchanges in the wake of rising trade tensions, unpredictable exchange rate fluctuations and high public and private debts are in reality, worsening the situation. In addition to this, tightening of the interest rate by Fed Reserve and other central banks is actually reducing demand and production. The decreased capital inflows and foreign investments are the direct impact of the lowered investment sentiments.
The situation is not so different in emerging economies where the increased oil prices, tariff concerns and persisting inflationary pressures have softened the commodity. In this regard, despite the growing concerns, IMF and World Bank projected a sustained and increased growth rate for the Indian economy. However, even this projection has to be checked as the tensions in the Generalized System of Preferences (with the USA), tensions in the border and the results of upcoming general elections could actually influence in the long run. Though the dropping oil prices could balance the situation to a certain extent, concerns over the rising fiscal deficit and the financial distress of the banking sector are still unresolved and challenging ones.
The crisis of the European countries and the growing tensions in the Middle East are yet other areas of deep concern. The problem of low investment and high unemployment emerged from the global recession of 2008 hasn’t freed the European economies yet. The UK economy is in its worst performance with the results of Brexit and instability tampering the economy. However, the reports have provided an optimistic insight into many of the emerging economic areas. The sub-Saharan African regions, Latin American countries and Commonwealth countries are projected to pick-up in the growth rate and gain momentum in the coming years. The recessionary trends in Argentina and Turkey, the natural disaster that struck Japan and the pressures in Italy along with the weakening Chinese economy and changing fuel standards of Germany are other reasons for the projected slow down.
It is very much imperative to have a mutually binding and co-operative approach for a sustained and revived global growth rate. The trade tensions and tariff regulations should be well negotiated, so as to win back investors’ confidence and exchange rate stability. The increased government spending for economic activities along with the goal of balancing fiscal deficits must be realized as a need as well as a challenge. The lack of aggregate demand still persists as one of the drawbacks of advanced economies. However, on the other hand, infrastructural bottlenecks are the reason for lag in the speed of developing economies growth rate. Also, how far the growth rate is the indicator of real GDP is another aspect to be considered. Growth rate with certain rate of inflation is characteristic of a developing economy to a tolerable level. Thus, the growth must be reflected in terms of real GDP than in nominal factors.
As the economy faces stagnation and low demand, the inability of the Central bank to have loose monetary policy is a great concern. Thus, the twin responsibility of the government rests upon maintaining inflation and enhancing production. Maintaining good international relations and cross-country trade relations are other requirements. More tensions in the form of civil wars, deterioration of mutual trust along with cross-border wars and environmental concerns could actually question not only the economic stability, but social and ecological well-being as well. Thus, efficient and binding monetary and fiscal policies, trade negotiations and mutual co-operations, investment confidence and good diplomatic relations are the needs of the hour.
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