World economy still in the doldrums

The performance of the Indian economy appears to have improved due to, among other things, the prospects of a favourable monsoon.

However, the current state of the world economy leaves little or no room for optimism.

During the current calendar year, the world economy is expected to grow at a niggardly 2.25 per cent, a quarter of a percentage point higher than the 2 per cent growth that was recorded during 2002.

Whereas geopolitical uncertainties are easing, the persistence of a slowdown in trade and investment and rising unemployment continue to hold back world growth as well as hopes for significant progress on poverty reduction.

This has been stated in the latest United Nations World Economic and Social Survey, 2003, released on June 25.

"Overcapacity will continue to have a dampening effect on the business investment that is necessary to sustain recovery," the survey said, adding that with effective demand weak the world over, the overcapacity created by excessive investment in the 1990s -- especially in the information technology and communications sector -- has not reduced as quickly as expected.

The survey report prepared by the UN Department of Economic and Social Affairs points out that while many developing countries are gaining on account of higher prices of commodities, these prices still remain at historically low levels.

Countries that are able to borrow in international capital markets are able to take advantage of the low interest rates currently prevailing.

However, the complicating factor in the international economic environment is the long-anticipated decline in the value of the US dollar, largely in reaction to the ballooning American external deficit.

US growth has been the engine of global economic recovery in recent years.

Thus, while the depreciation of the dollar would boost American exports, the possible reduction in US imports would lessen the extent of the stimulus to the rest of the world.

More ominously, the UN survey adds, the continued fall in the global value of the American greenback would have a negative impact on US financial markets as it reduces the return foreign investors obtain on dollar-denominated financial assets.

"This may lead to further decline in capital inflows to the United States and reduced demand for the dollar, begetting more depreciation of the dollar. If such a vicious circle were formed, financial markets worldwide would be in jeopardy," the survey warns.

It says the depreciated dollar is among the reasons why a robust global recovery would need to be built on a broader base than just the US economy.

The report states that though the world economy had not yet recovered from its slowdown in 2001, "China and India, together with a number of economies in transition, were notable exceptions to the sub-par performance that characterized the majority of the world's economies."

The report says: "The first few years of the new millennium have been a development disappointment for the majority of developing countries and an absolute setback for a number of them."

During both 2001 and 2002, "a substantial number of developing countries as well as a few developed countries and economies in transition, experienced a decline in output per capita."

On the US-led invasion of Iraq, the UN report observes that the "fear that conflict might disrupt oil supplies raised the prices of oil far higher than warranted by economic fundamentals; higher oil prices were themselves a global economic shock that dampened aggregate demand and imposed additional price pressures in oil importing countries."

"Global political tensions caused most equity markets to plummet, aggravating the global asset price deflation that had been in effect since 2000," the report states, adding that "in several countries, consumer and business confidence fell to their lowest levels in a decade" with capital spending falling in many developed economies.

"Economically, the overall effect of the stand-off with Iraq was reduced activity in late 2002 and early 2003, with the setback being most pronounced in developed countries," it has been said.

The statistical tables in the report indicate that during 2002, against world output growth of 1.8 per cent, the fastest growing parts of the world were the Baltic States, which grew at 6.3 per cent, followed by Eastern and Southern Asia (including China and India), which grew by 5.7 per cent and the Commonwealth of Independent States, which grew by 4.7 per cent.

During 2002, the rates of growth of other parts of the world were: North America 2.5 per cent, Western Europe 1 per cent, Asia and Oceania (Japan, Australia and New Zealand) 0.5 per cent, Central and Eastern Europe 2.6 per cent, Africa 2.9 per cent, Western Asia 2 per cent and Latin America and the Caribbean (-) 0.8 per cent.

A similar trend is revealed in the report's forecast for 2003. The Baltic States are expected to grow the fastest (5.5 per cent) followed by Eastern and Southern Asia (5.25 per cent), the CIS (4.5 per cent), Africa and Central and Eastern Europe (both at 3.25 per cent).

Output growth is slated to be sluggish in other parts of the world -- 2.5 per cent in North America, 2 per cent in Latin America and the Caribbean, 1.25 per cent in Western Europe and Western Asia and 1 per cent in Japan, Australia and New Zealand.

The UN report is not entirely pessimistic. It expects a rise in consumer demand in the latter half of this calendar year, spurred to an extent by a recovery in the United States.

World exports, having declined in 2001 and after having grown by 2 per cent in 2002, are expected to grow by a little under 4 per cent this year and by around 7 per cent in 2004.

"With the global economic recovery gaining momentum and with the weakening of the dollar, most non-fuel commodity prices are expected to strengthen during 2003 as a whole and in 2004," the report has stated.

All in all, the overall scenario is a rather mixed one with the negatives tending to outweigh the positive elements.

The real rate of growth of India's gross domestic product came down from 5.6 per cent in 2001-03 (year ending March) to 4.3 per cent in 2002-03.

As already mentioned, there is every indication that the rate of growth of GDP during 2003-04 would pick up. There is, however, not much room for complacency.

For those in India who are hopeful of export growth being maintained at an impressive rate in excess of 15 per cent, the overall external economic environment does not appear particularly cheerful.

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