India Sole Bright spot in Slowing World Economy

Christine Lagarde, chief of International Monetary Fund (IMF), has said that global growth will likely be weaker in 2015, with only a modest acceleration expected in 2016, but India remains a bright spot.

According to Christine Lagarde, “India remains a bright spot. China is slowing down as it rebalances away from export-led growth. Countries such as Russia and Brazil are facing serious economic difficulties. Growth in Latin American countries, in general, continues to slow sharply. We are also seeing weaker activity in low-income countries, which will be increasingly affected by the worsening external environment. At the global level, there is still a drag on the economy because financial stability is not yet assured. She was addressing IMF, ahead of the IMF-World Bank Annual Meetings
held in Peru.

“The good news is that we are seeing a modest pickup in advanced economies. The moderate recovery is strengthening in the euro area, Japan is returning to positive growth, and activity remains robust in the US and the UK as well. The not-so-good news is that emerging economies are likely to see their fifth consecutive year of declining rates of growth,” Lagarde observed. She noted that despite progress in recent years, the financial sector’s weaknesses remain in many countries, and financial risks are now elevated in emerging markets.

Referring to the World Economic Outlook numbers, Christine Lagarde said global growth would likely be weaker in 2015, with only a modest acceleration expected in 2016. “There has been a sharp deceleration in the growth of global trade. And, the rapid drop in commodity prices is posing problems for resource based economies.” China is in the midst of a fundamental and welcome transformation. “It has launched deep structural reforms to lift incomes and living standards. These reforms will, by design, lead to a new normal of slower, safer, and more sustainable growth. The new model relies more on consumption and less on commodity-intensive investment – that is, is more on services and less on manufacturing.”

According to Christine Lagarde, it also requires transitioning to a stable, more market-driven financial system. In other words, China’s policymakers are facing a delicate balancing act: China needs to implement these difficult reforms while preserving demand and financial stability. This kind of major transition can create spillover effects through trade, exchange rates, asset markets, and capital flows. “We saw some of these spillovers in recent months: investors were worried about the speed at which China’s  economy is slowing. These concerns put further pressure on commodity markets and triggered sizeable currency depreciations in a number of commodity exporters. Those countries have, for many years, relied on China as an export destination. For example, China consumes 60% of the world’s iron ore. But, as it invests less, China will reduce its appetite for commodities.”•

Author: SubEditor

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