Aspire for a New Modi, Not a New Mediocre
October 13, 2014 --
Last week was one the global economy would likely rather forget. Equity prices in much of the world were tumultuous and, on net, tumbling. Oil prices were similarly sliding, by Friday morning at lows not seen in nearly four years. Many wise minds were fingering as the main culprit new data and forecasts of weaker economic growth. On Wednesday, minutes released from the August meeting of the U.S. Federal Open Market Committee revealed widespread Fed concern about weakening growth abroad. On Tuesday, the International Monetary Fund released its biannual World Economic Outlook, which was chock full of projected downgrades and risks. IMF managing director Christine Lagarde was left to wonder aloud about the world slumping into a “new mediocre.”
The IMF is now projecting a growth rate for world gross domestic product of 3.3 percent for 2014—down from its forecast of 3.7 percent just six months ago. The source of this slower growth, says the IMF, is that “countries must address the legacies of the global financial crisis, ranging from debt overhangs to high unemployment,” while also dealing with slower growth, which is depressing confidence and demand.
Indicative of widespread weakness is whom the IMF identifies as one of the brightest spots: the United States. U.S. projected GDP growth of a modest 2.2 percent this year and 3.1 percent next year are higher than for any other developed economy. To put those figures in perspective, the average annual growth rate of the U.S. economy from 1949-2000 was 3.6 percent. Since then, growth has averaged just 1.8 percent.
And while the official U.S. unemployment has recently fallen below 6 percent for the first time since the Great Recession, considerable slack remains in the labor market. The still-falling labor force participation rate now stands at 62.7 percent—its lowest point since February 1978. In April, the percentage of men in the labor force between the ages of 25 and 54 was lower than in any month since the federal government started keeping track of that figure in 1955.
But the U.S. economy is in overdrive compared to Europe. The eurozone economies are now projected by the IMF to expand GDP by just 0.8 percent this year and 1.3 percent next year, with the Fund stating there is a 40 percent chance the eurozone will fall into recession next year. Eurozone real domestic demand is still about 5 percent below where it was in the first quarter of 2008 and unemployment (11.5 percent) is about five percentage points higher. Emblematic of the region’s weakness is the annualized inflation rate, which was just 0.3 percent in September. As we’ve noted previously, Spain and Italy are threatened with outright deflation—a condition that can send economies into a prolonged tailspin (just ask Japan).
China will be the biggest engine of growth for the foreseeable future, though it, too, is slowing. While GDP growth rates exceeding 7 percent are forecasted for this year and next, making China the envy of most of the world’s economies, this year’s expansion looks to be the country’s slowest since 1991. Taken together, emerging economies are projected to record 4.4 percent growth this year—down from 5.1 percent in 2012 and 7.9 percent in 2007. With developing economies having accounted for more than 80 percent of global economic growth since 2008, their slowdown is the global economy’s slowdown.
Will the economic climate improve in 2015? The IMF is projecting that global GDP growth will increase to 3.8 percent next year. But the IMF’s projections have been, on average, too optimistic by 0.6 percent in recent years, notes the Financial Times. And even the Fund is hedging: “With weaker-than-expected global growth for the first half of 2014 and increased downside risks, the projected pickup in growth may again fail to materialize or fall short of expectation.” Those downside risks are, in fact, formidable: conflict in the Middle East, continued Russian revanchism, the spread of Ebola, an intensification of China’s crackdown on protesters in Hong Kong, European deflation, rising U.S. interest rates, and declines in record-high asset valuations.
Thus does Ms. Lagarde survey the world and worry about a new mediocre. We’d like to politely suggest a sunnier alternative for business and policy leaders to focus on: a “new Modi.”
One of the few countries whose forecast the IMF upgraded last week was India. Its GDP growth is now expected to tally 5.6 percent this year and 6.4 percent next, well above its recent performance. Why the upgrade? In part, “The post-election recovery of confidence in India”—i.e., the hope that newly elected Prime Minister Narendra Modi will lead “that country to embark on its much needed structural reforms.”
We have previously commented here on Prime Minister Modi’s potential to spur faster economic growth in India. This potential gained momentum two weeks ago with Modi’s visit to the United States during which he was widely hailed as a “rock star.” He dined at the White House with President Obama. He visited with a who’s-who list of CEOs of iconic American companies. In a Wall Street Journal op-ed column, he extended to the world’s leading manufacturers, “An Invitation to ‘make in India.’” He delivered a standing-room-only speech to non-resident Indians at iconic Madison Square Garden, during which he basked in chants of, “Modi, Modi.”
Yes, faster economic growth requires wisely structured policies toward infrastructure, international trade, business taxation, and the like. But time and again countries have managed to implement such policies only when inspired to do so by leaders who give voice to why such policies are so critical. We were awestruck by the articulate, choreographed message Prime Minister Modi brought to America. We are left wondering why so many countries are settling for a new mediocre rather than a new Modi.
Articles © 2014 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2014 Trustees of Dartmouth College. All rights reserved.