World economy: Looking up

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by Surjit S Bhalla

It is on course for high growth, low inflation, lower taxation, increased income support for the needy. And declining inequality.

The world economy had a very successful year in 2017. Just how successful can be gleaned from the fact that GDP growth (IMF data) registered close to 3.7 per cent in 2017. Unemployment rates in the advanced economies (AE) are at multi-year, if not historical, lows. What is surprising is that (median) inflation rates in AEs, while up from near-zero levels in 2015 and 2016 (0.3 and 0.8 per cent respectively) could only register 1.6 per cent in 2017.

The IMF forecast is for AE inflation rates to stay “constant” at around 1.6 per cent in 2018, before inching towards 2 per cent in 2022.

The emerging markets (non AEs) also had a banner year in 2017, registering a mean GDP growth rate of 4.4 per cent, up from the 4 per cent levels of the previous two years. Median inflation rates also stayed low, at 3.2 per cent in 2017, up from 2.3 per cent levels the previous two years. This rather laboured presentation of basic macro-economic data is for two reasons: One, to achieve some clarity on what has happened, and two, to provide some perspective on what lies ahead.

Regarding the past — emerging markets contain 85 per cent of the world’s population and have grown faster than AEs by an average of 1.35 per cent per capita per year, and done so for the past 37 years. This means that average incomes in the emerging world have gained on average incomes in the West by around 65 per cent. Still, a long gap in average incomes remains, but the journey has well and truly started.

These facts put into perspective some of the extraordinary claims being made about world inequality getting worse. To be sure, income inequality in the US is at its highest level ever — while global inequality (including the US) is at its lowest levels ever, or at least since 1870.

What are the likely economic downsides in 2018, and beyond? If not inequality, it must be inflation that will rise phoenix-like, around the world, and especially in inflation-prone India. Even if inflation registers a high 4.5 per cent average in each of the remaining four months of this fiscal year (December 2017 through March 2018), the average fiscal year inflation in India will still register only 3.5 per cent, a full percentage point lower than the 4.5 per cent observed in 2016-17. More to the point — this 3.5 per cent will be the second-lowest inflation level recorded in India, ever (or since 1980). Lowest inflation rate: 3.4 per cent in 1999/2000, a year after the 13.3 per cent onion inflation of 1998/99. Unless inflation hawks can tell us exactly what they are eating, and digesting, inflation levels in India are unlikely to exceed the median rate in emerging economies by much in the foreseeable future. The IMF forecasts this median rate to fall towards 3 per cent by 2019. Which means that India is unlikely to see the average headline rate above 4 per cent in 2018/19.

The IMF can be wrong about its inflation forecast. If they are wrong, my forecast will also be in jeopardy. But I am unlikely to be too far in error about the inflation spread between emerging markets and India. Many (make that most) Indian experts are visualising Indian CPI inflation registering at least 4.5 per cent for the foreseeable future (next couple of years).

Indian GDP growth numbers for 2017/18 are not very flattering. We had (at least) two major economic reforms in the past year — demonetisation and the beginnings of the implementation of GST. It is likely that by mid-year next year, GST will be approaching the clean two-tier tax system that most of us, and India, wants. And if GDP growth rate begins to exceed 8 per cent, we will all conclude that the slow growth pain of 2017/18 of 6.7 per cent was a price worth paying. For the year gone by, GDP growth rate in emerging markets accelerated by 0.4 per cent (over 2016-17). In India, the likely outcome is that GDP growth would have decreased by a near similar magnitude. The next few months data are eagerly awaited.

I want to close this futuristic assessment with comments on a few broad trends that are likely to emerge. Oil price increases, even if they occur, are unlikely to have much of an inflationary effect in most parts of the world. Median inflation rates in advanced economies declined from 2.7 per cent in 2000 (Brent at $28/barrel) to 2.2 per cent in 2007 (Brent at $72/barrel). Global growth is likely to approach 4 per cent in 2018, and if it does so, it will be near the top of its range for the last 42 years, barring the four go-go years, 2004-2007. At the same time, a drift in global growth towards 3.5 per cent cannot be ruled out.

Regardless of how transparent and effective the US corporate tax cut is, one should not underestimate its significance for the rest of the world. Likely good news for India, as Modi-Jaitley are on record that reduction in corporate tax rates is a major policy goal.

Throughout this article, I have assiduously avoided talking about employment. Job creation is not just an Indian problem, it is a worldwide phenomenon. Again, and not just to plug my book The New Wealth of Nations, one of the biggest developments in 2018 might be the beginning of a new (world) welfare order, a welfare order that emphasises work-related income support, and a guaranteed cash transfer (basic income) for the bottom quarter of the population. This, along with tax cuts, increased compliance and competition-induced low inflation, may provide the world with one of its best Goldilocks years.