Many major emerging economies, such as India, Brazil and Indonesia, rely on borrowing and the latter two on raw material exports. If the Fed tapering and Chinese transition to more sustainable growth happen together, these economies would slow more than the modest growth gains currently projected. This is a downside risk. While Indonesia recently cut fuel subsidies, the approaching election could slow policy responses; political scandals in Brazil could also impair strong responses to policy challenges. India remains in a slowing mode due to a weak currency, inflation and policy paralysis facing outsize budget deficits. Whatever reforms were attempted, implementation remains frozen pending the spring 2014 election.
Other developing nations rely either on manufactured or raw material exports. Both are likely to be somewhat subdued due to China's switching its growth away from resource-heavy investment to consumption as well as the slow growth and aging of rich nations. However, somewhat higher growth is expected next year for most less developed countries.
If forecasts work out and the rich countries average 2 percent growth in 2014 while the emerging economies average 5 percent, the expected 3.5 percent growth would be realized - a rate similar to what the world experienced from 1995 to 2004, except the 3.5 percent is reached by the higher weight of the emerging economies offsetting slower growth of rich nations. So, the world is back to normal despite problems in half of its GDP!
This change shows up clearly in the slower growth of trade. From 1995 to 2004, the volume of rich country exports grew at 6.4 percent a year, while from 2012 to 2014 the growth falls to 2.9 percent. Nonfuel emerging economies once grew at 10.2 percent a year, but their exports grow only half as much from 2012 to14. Imports follow broadly similar patterns. It's true that 2014 shows improvement - 4.7 percent for rich exports and 6.7 percent for the emerging countries. Still, global trade has slowed dramatically, in total and relative even to slower GDP growth. This slowdown is part of the reason for sluggish job growth in many parts of the world, along with lingering credit problems, aging populations and overall weak demand.
If unexpected monetary or fiscal shocks occur, the downside risks the IMF refers to would appear. Because of excess capacity and unemployment, there is scant fear of inflation despite trillions of dollars of excess liquidity and negative real interest rates. Some opine that bubbles are forming in financial markets - at least on a price/sales basis if not a price/earnings metric. Profit/GDP ratios are at all-time highs. A sharp decline in stock prices would likely depress global growth, although ownership of financial equity wealth is so concentrated, it's not clear that significant direct pain would be widely felt. The Fed must continue to weigh, should interest rates rise and allow positive returns for savers or should owners of equities, fewer in number than holders of bank savings accounts, be pampered with special liquidity programs, which also benefit highly leveraged banks and other big investors, but may not boost jobs much?
Economists and others debate whether the world's sustainable growth rate is falling or not. Putting aside hugely relevant environmental concerns, the answer may be that aging populations, slower technical change as expressed in productivity and structural transfer problems suggest that growth is slower for now. Perhaps the rich world will grow more slowly than it did even a decade or two ago, while China and perhaps India also slow. That leaves many billions of workers and consumers who may still outstrip their recent past, but their weight in total GDP is modest. Unless the rich find ways to grow faster, the world will probably face modest growth for a while until the weight of the faster growing emerging economies finally starts to be felt more.
Note on IMF forecast: [1] This forecast weights economies by their purchasing power parity rather than their exchange-rate GDP. The practical effect of this is to generate a higher growth number since about half of the global economy comes from emerging markets at PPP but only about a quarter at exchange-rate conversion, and emerging markets grow faster than those in Europe, North America and Japan. PPP adjusts non-tradable production in poorer economies and marks it up so that it's comparable to the US. In other words, a haircut is priced the same in PPP but would be lower in emerging economies if converted at the going exchange rate.
