Just before last week's conference of Group of Twenty (G-20) finance ministers and other meetings in Washington, the International Monetary Fund (IMF) revised downwards its forecast for global growth in the current year. (It reaffirmed its expectation that India would be the fastest growing large economy in the world.) In a press conference, the IMF managing director urged member states to consider growth-friendly fiscal policies. Have the virtues of fiscal austerity been exaggerated?
Turning first to the global political economy, in the European Union, the European Central Bank's monetary stimulants under various technical names, and zero/negative interest rates in the eurozone and several non-euro countries, have so far failed to bring inflation up to its target of two per cent. The UK is also slowing. The referendum in June over "Brexit" from the European Union, and if the vote is "yes", its impact on the European economy in general, and the British economy in particular, add to the uncertainties. Europe is also distracted by the problem of refugees from the Middle East, with most countries reluctant to admit them. Extremist parties seem to be gaining political ground.
Across the Atlantic, the US economy is doing a little better, but there is talk of the Federal Reserve having to defer the second rise - and even being forced to reverse the December increase in the Federal Funds rate. The fact that 2016 is an election year adds to the uncertainties. (Is Donald Trump's possible election as US President the biggest risk to the global political economy?) With unemployment refusing to fall much, the US treasury secretary urged the IMF to monitor exchange rate fluctuations closely and punish currency "manipulators", whoever they are. Trade protectionist agenda seems to be back on the table once again, partly because wages are stagnant.
Turning to Japan, years - indeed, a couple of decades -of ultra low interest rates and fiscal deficits have helped spur neither inflation nor growth, and the recent rise of the yen is another negative factor for the economy. Clearly, even for the US and Japan, exporting so-called "differentiated" goods, the exchange rate is an important macroeconomic variable. We are, of course, braver -Finance Minister Arun Jaitley reiterated in Washington that we do not follow an exchange rate policy to gain competitive advantage: this, despite our imports of goods being almost 50 per cent higher than exports, helping create jobs in other countries! How altruistic!
Coming to China and India, the former recorded a growth rate of 6.7 per cent in Q1 of 2016, thanks partly to higher exports, and we are expected to grow at 7.5 per cent or so in fiscal 2016-17 if official forecasts, also confirmed by the IMF, are to be taken at face value. Both have major problems of bad debts in the banking system: China because of over-investment and excess capacity; India, at least partly, because of double-digit real interest rates for much of business, and an overvalued exchange rate. The other BRICS members have even bigger problems: Brazil because of low commodity prices and a corruption scandal that has led to impeachment proceedings against President Dilma Rousseff and her predecessor. The country's largest company, Petrobras, is suffering from both low oil prices and another corruption scandal in which a billionaire banker is caught up. The situation in South Africa is not much different: low commodity prices, three finance ministers in less than a week, and question marks over President Jacob Zuma's relationship with an Indian-origin business family. He seems to be losing the confidence of his own party. Russia has been hit by low energy prices but seems to be weathering the problem better than other commodity producers, despite western sanctions arising from its supposed role in Ukraine. Some of the large non-BRICS emerging economies are also in trouble: Indonesia, a commodity producer; Malaysia (a corruption scandal involving the prime minister, who of course denies the allegations); Nigeria; Venezuela, a major oil exporter with a leftist government. The list is long and growing.
Overall, global economic recovery has slowed and the slowdown may well continue for the rest of the decade. Growth in global trade has stalled, partly because of lower oil and other commodity prices - and also because of volatile exchange rates in real terms? Will globalisation, the process of integrating the global economy, go into reverse? If this is limited to volatile, speculative finance capital flows and their impact on exchange rates, I, for one, would be happy.
The author is chairman, A V Rajwade & Co Pvt Ltd; avrajwade@gmail.com
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