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World Economic Outlook

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April 27, 2017

Why in news?

International Monetary Fund’s (IMF) recently released World Economic Outlook.

What is secular stagnation?

  • Many economists believe that the world economy was in the grip of ‘secular stagnation’
  • It is an expression coined by the economist Alvin Hansen in the 1930s.
  • Hansen argued that where savings substantially exceed investment, the real interest rate tends to drop to a very low level.
  • Conventional monetary policy operates by reducing nominal interest rates in order to stimulate growth.
  • Where the nominal interest rate is already close to zero, there isn’t much scope for cutting interest rates.
  • In conditions of ‘secular stagnation’, conventional monetary policy is doomed to be ineffective.
  • The burden of reviving growth in such a situation falls on fiscal policy.
  • This means running up large government deficits and increasing public debt.
  • But markets will finance government borrowings only up to a point.
  • There is also resistance among policymakers to increased government spending.

What is the present world economic scenario?

  • This seemed to be an accurate description of the world economy in recent years.
  • The real interest rate had been falling for several years.
  • This was because savings were rising and investment was falling.
  • Higher savings flowed from factors such as greater inequality, greater life expectancy and reduced post-retirement benefits.
  • Investment had fallen because capital goods had become cheaper.
  • With decreased spending, inflation rates also fell in the advanced world.

What are the findings of IMF?

  • The prospects for the world economy have improved.
  • The world economic growth accelerates from 3.1% in 2016 to 3.5% in 2017, and 3.6% in 2018.
  • Growth in advanced economies is projected to rise from 1.7% in 2016 to 2% in 2017 and 2018.
  • Emerging markets will grow at 4.5% in 2017, and 4.8% in 2018, compared with growth of 4.1% in 2016.
  • China will see growth decelerating from 6.7% in 2016 to 6.6% and 6.2% in 2017 and 2018, respectively.
  • India’s growth, in contrast, will accelerate from 6.8% in 2016 to 7.2% and 7.7% over the next two years.
  • The IMF also warns that high income inequality is likely to persist.
  • The IMF warns that emerging markets, including India, will find the external conditions for growth less supportive than in the post-2000 period.
  • Tightening monetary conditions in the advanced world spell lower capital flows.

 

Source: The Hindu

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