Global Economy and Indian Economy are on Shaky Ground

The global economy witnessed a lot of turbulence in 2019 with intensified trade wars and Brexit delays influencing the growth story tremendously. Should businesses expect more volatility in 2020 or are global economic prospects looking up -is the main theme of this column.

After a very low pace of growth in 2018-19, the weakest since 2009, the global economy is set for a marginal recovery in 2020, especially driven by emerging markets. Global growth is expected to pick up from 2.9% in 2019 to 3.2% in 2020. Subdued growth is expected for advanced economies while emerging markets and developing economies should register a modest growth acceleration. Trade wars and Brexit were the top developments that dominated the 2019 growth story and these events will continue to have major ramifications in 2020 as well. A lot of uncertainty has cleared up as regards Brexit after the UK’s Conservative Party secured a majority in the 2019 elections. The finalization of a Phase 1 US-China trade deal in December 2019 has helped lift market sentiment globally. Intensification of the trade war between the two countries is now less likely in 2020, while a ceasefire trade war scenario is the most probable in 2020.

A full-fledged recovery may not be possible due to the truce in US-China trade tensions, a turn in the global tech cycle, loose macro policies. Further, a depreciating USD will help add to global liquidity and add to emerging market economies.

As regards North America, while trade wars are seen to be denting the US economy, Canada appears to be benefitting from exports. Similarly, Southeast Asia’s position as a manufacturing destination is also growing as companies are poised to relocate production from China to the region in order to circumvent punitive tariffs. Advanced economies such as the United States and Japan are expected to continue to experience a slowdown in 2020, while emerging markets such as Brazil and Mexico should see growth acceleration this year. Growth prospects in 2020 for both the United States and China have marginally improved following the finalization of the Phase 1 trade deal. However, the dangers of a re-escalation of US-China frictions, a worsening slowdown in China’s economy and a global credit crunch cannot be ruled out.

As far as India is concerned, domestic credit conditions may remain tight as market concerns in the shadow banking sector have persisted for too long. Thus, India’s growth is set to slow down further in Q4, delaying the recovery expected, and a downside surprise on GDP growth is likely in 2020. In the near term, inflation may further overshoot the RBI’s 4% target owing to high food price inflation and other supply-side shocks. As on 14th Feb 2020, India’s wholesale inflation rose to an 8-month high of 3.1% in January 2020. The last time the wholesale inflation touched 3.1 per cent was in April 2019. The retail inflation calculated on the basis of Consumer Price Index (CPI), inched upwards to 7.59 per cent during January 2020. This is the second month that inflation remained above the upper limit of 6 per cent set by Reserve Bank of India (RBI). Though this is a transitory phenomenon, the response of the RBI on 20th Feb 2020 gains prominence from the context of the minutes of its monetary policy meeting.

The burden to perform the heavy lifting for economic growth now seems to be shifting to fiscal policies. The crucial issue of India is its triple balance sheet problem involving banks, corporates and shadow banks and this has tightened credit conditions. Over a year after the crisis first erupted, differentiation among shadow banks persists due to elevated credit risks while bank lending has remained subdued.

Overall, 2020 could be a watershed year for monetary policies across the world and if the Fed and ECB decide to run their economies hotter than before or alternatively, if it becomes plain that monetary policy is on its last legs, 2020 could be the year that fiscal policy takes over as the main tool of global stimulus, which invariably may also be followed by India.

Leave a Comment