The International Monetary Fund’s (IMF) latest outlook for the world economy has a lot of hope pinned on Asia, particularly India and China, which it sees growing at 5.4 per cent and 8.5 per cent, respectively, in 2009. The swift turnaround in the rest of Asia’s export-oriented economies is also ‘remarkable’. But it is a rebound fed by temporary factors like fiscal and monetary easing, resumption of capital flows, and inventory adjustment. “These forces may not be able to bring about a self-sustaining recovery if activity does not strengthen in other regions,’’ the IMF warns. “The challenge is to determine when and how to withdraw policy support while ensuring a successful transition to more balanced medium-term growth.”
The US and Europe are in for protracted adjustments as they repair their financial systems and households that suffered asset price bubbles busts rebuild their savings. The IMF estimates potential growth in the US will remain below 2 per cent for a considerable time on permanent output losses relative to pre-crisis trends. As a corollary, Asia will have to tweak its demand to rely less on exports. The structural shift requires wider social security to discourage precautionary Asian savings, more robust financial markets to lessen the dependence on foreign capital and flexible exchange rates to restore the global trade balance. For the immediate future, the IMF flags double-dip recession. “Is a renewed recession in the offing over the next year as expansionary monetary and fiscal policies lose impetus and private demand fails to gain momentum in the face of limited credit?” The answer: there is a recovery, but it will be weak by historical standards.
India’s aggressive fiscal expansion has put it at the forefront of this recovery. Its stock market has climbed a staggering 110 per cent from its post-crash low and its factories are restocking inventories furiously. Historically, India has trailed most of Asia in exports, so the dependence on the West for demand revival is low and the need for medium-term restructuring will be less onerous. The principal area of concern is the timing of the exit strategy. Being among the first to recover, India will have to unwind its fiscal and monetary stance at a time when most of the world will be pursuing it vigorously. A small price to pay for standing out in a crowd.