Global GDP growth has steadily declined in the past few years. Which country can be the engine of global growth? This is a round-up of how different economies are performing.
By Anupam Manur (@anupammanur)
Global GDP growth as measured by various international agencies has constantly decreased in this decade falling from about 5% in 2010 to just around 3% now. A 2 percentage points drop in global growth is quite a huge fall, which has alarmed many economists, who are now searching for new sources of global growth. The traditional forces seem to be fading and there hasn’t been any new economic power house to pull the global economy forward.
China has been the engine of global growth for quite some time now. It has consistently managed to grow at around 10% for an impressive 30 years. For the first 20 years, the impressive growth rates were achieved through genuine economic reforms when China moved away from a completely state-run economy to a more liberal, private sector led economy. The next 10 years, roughly the decade of 2000s, saw China post impressive growth rates again (as high as 14% in 2007). However, this time, the growth was unsustainable and was mainly powered by huge borrowings. In the past few years, the unsustainability of the debt fueled growth has begun to show up and China has considerably slowed down. China posted 6.9% in the last quarter of 2015, the lowest growth rate in a long period.
What’s even more worrying is that the Chinese debt burden is manifesting in structural flaws in the economy. Total Chinese debt – government + non-financial corporate + financial institutions + households – account for as high as 282 percent of GDP. In 2001, it was 121 percent of GDP and 158 percent in 2007. Again, the debt problem is compounded by the fact that the Chinese economy is slowing down. This has led to a bond market bubble, a stock market correction, decreased foreign exchange reserves and increased borrowing costs for China.
China is due to slow down further in the coming years and it might not be able to rebound to its previous high rates of growth any time in the near future. Further, China is aiming to reorient its economy from an export oriented, manufacturing dominated economy to an internal consumption led, more balanced one. This can have severe implications for the world economy. Chinese manufacturing accounts for a huge portion of global industrial and manufacturing base. It was a fuel guzzler and was a voracious importer of commodities. Given the slowdown in Chinese manufacturing, not only has the world seen a dip in global index of industrial production, but has also witnessed a massive drop in commodities and fuel prices.
The European Union is now slowly crawling back to positive growth territory. Since the financial crisis, the Euro Area underwent a prolonged recession, with devastating consequences for many of its individual country members such as Greece, Spain, Ireland and Portugal amongst others. The Euro Area posted around 1.5% GDP growth in the last quarter of 2015, largely led by a German revival. However, the Euro Area is faced with some deep structural problems, such as an ageing population and the perennial debt problem (of many of its members). Further, the loose monetary policy maintained by the ECB currently is not sustainable in the long run. Japan is in an even bigger doldrum, with GDP growth rate hovering around 0%. The lost decade of the 1990s has now spilt over for two more decades.
The United States still remains the leading engine of global growth. Though it slowed down considerable after the crisis, it has bounced back gradually. Unemployment rates have been falling and the economy is seeming healthy. It is still the source of most innovations and technological development in the world. Remember, the US economy still accounts for nearly 30% of global GDP and thus, a 2-3% growth of the US economy can be significant for the world.
Most emerging markets have faltered in the changing economic landscape. Commodity exporters like Venezuela, Brazil, South Africa and Russia have been adversely affected by the falling crude oil and commodity prices. The growth rates in these countries have dropped drastically in the past year, with some of them even facing a contraction of output. The South-East Asian economies are performing moderately well and may continue to do so in the short to medium run.
Finally, India has been seen as the new leader of global growth. Many economists, including our RBI Governor Raghuram Rajan, has commented that India will be the next engine of global growth. However, this must be taken with a pinch of salt. Though it is the fastest growing economy in the world presently, the size of its economy is still too small to make a significant impact on global growth levels. Compare India’s two trillion dollar economy to China’s $12 trillion and US’s $17 trillion economies (nominal GDP). Further, India’s other domestic growth indicators have not been exactly encouraging. IIP numbers have been unimpressive, the size of corporate debt is worrying, the banking sector has been plagued with bad loans, and no significant structural reforms have been implemented in the last few years.
The 3% growth for the global economy should be viewed as the new normal and even for that to remain sustainable requires most of these countries to outperform.
Anupam Manur is a Policy Analyst at the Takshashila Institution.