Global Economics

IMF: India, China to Keep Growing Despite Downturn


The International Monetary Fund expects emerging economies to weather the U.S. slowdown better than previous downturns

India, China and other emerging economies are likely to weather better the unfolding financial market turmoil even as global growth decelerates in 2008, led by a sharp slowdown in the US, says the International Monetary Fund (IMF).

The IMF expects world growth to slow to 3.7 per cent in 2008—0.5 percentage point lower than what was forecast in the January 2008, says its latest Economic Outlook update released here on Wednesday.

The April 2008 report cites the turbulent financial market amid a housing correction and a financial crisis that has quickly spread from the US sub-prime sector to core parts of the financial system, as the biggest downside risk to the global economy.

Further, world growth would achieve little pickup in 2009, and there is a 25 per cent chance that the global economy will record three percent or less growth in 2008 and 2009, equivalent to a global recession.

By contrast, the rapidly globalising emerging economies have so far been less affected by financial market turbulence and have continued to grow at a rapid pace, led by India and China, although economic activity is beginning to moderate in some countries.

Nevertheless, growth across all emerging and developing regions will remain above trend, says the IMF report released ahead of the World Bank-IMF spring meetings over the weekend.

China and India—which grew at 11.4 per cent and 9.2 per cent respectively in 2007—are projected to grow at 9.3 per cent and 7.9 per cent respectively in 2008.

Pointing to the balance of risks around the IMF's projections as lying "somewhat to the downside", IMF Chief Economist Simon Johnson said at a press conference Wednesday that "the principal downside risk comes from the possibility that financial strains could deepen".

And even though the "sentiment in financial markets has improved in recent weeks since the Federal Reserve's (US central bank) strong actions with regard to investment banks", he noted that "strains in markets can quickly become reinforcing and a negative spiral remains a possibility," he said.

For emerging and developing economies, direct effects from the US downturn and financial strains have, to date, been much less pronounced than in past episodes, Johnson said. Stronger policy frameworks, rising intra-regional trade, productivity gains, and high commodity prices have contributed to their resilience.

Growth is expected to slow to 6.75 per cent in 2008, down from almost eight percent in 2007. Nevertheless, growth would remain above trend in all major regions, he said.

Although activity is slowing, inflation pressures have picked up around the globe mainly reflecting sharp increases in food and energy prices.

Commodity markets have remained buoyant overall and, in many cases, have touched new highs, reflecting the still strong demand from emerging economies, such as India and China, sluggish supply responses, and the increasing attractiveness of commodities as an asset class, he noted.

The resulting inflation pressures are particularly intense for emerging economies, where food and energy account for a large share of their consumption baskets and where growth has held up reasonably well.

In India, growth in consumer prices, which has been rising alarmingly in the recent past, is expected to moderate to 5.2 per cent in 2008 and four per cent in 2009 as against 6.4 per cent in 2007.

Other emerging and developing economies, including in Africa and Latin America, are also expected to maintain robust growth rates, the IMF report said noting they have been more resilient during the current market turmoil than in previous episodes.

Three broad factors are providing the momentum for growth in emerging and developing economies: first, strong productivity gains from the continuing global integration of these economies; second, better terms of trade for commodity producers as prices of commodities such as oil and other raw materials continue to soar; and third, stronger institutions and macroeconomic policy frameworks.

Johnson flagged continuing inflation worries, particularly in the wake of increasing commodity prices, large current account surpluses, and the "uneven pattern of exchange rate movement around the world" as the other downside risks.

On currency movements, he said the IMF's medium-term view was that "the dollar-in real effective terms-is now closer to its equilibrium value than at any time since the late 1990s, although it still remains somewhat on the strong side."

The euro is on the strong side, the yen remains undervalued, and the Chinese renminbi "remains considerably or substantially undervalued," he added.

Blaming the twin forces of deteriorating financial market conditions and the continuing correction in the US housing market, the IMF predicts that the US will slip into a "mild recession" in 2008, from which it will recover only modestly in 2009.

The ongoing commodity price boom continued in early 2008, notwithstanding the market turmoil and slowing growth in major advanced economies.

The IMF commodity price index rose by 44 per cent from February 2007 to February 2008. Prices of many commodities-including crude oil, tin, nickel, soybeans, corn, and wheat-reached record highs in current US dollar terms.

Strong demand from emerging economies has accounted for much of the increase in commodity consumption in recent years and has been the driving force in the price run-up. Biofuel-related demand has added to the demand for major food crops, especially corn, the IMF report said.


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