Saturday, April 21, 2007

IMF upbeat on economic outlook

The IMF's latest World Economic Outlook (April 2007) is surprisingly upbeat on global economic prospects. In 2007 and 2008, the IMF expects the world economy to grow at 4.9%, down slighlty from 5.4% in 2006. For India, the projected growth rates are 8.4% and 7.8% compared to 9.2% in 2006. I can understand the deceleration projected in India in 2007. I can't figure out why there should be further deceleration in 2008.

The key point in the IMF report is about how the world economy is likely to be "decoupled" from the US economy in the next couple of years. The US economy itself is projected to slow down sharply from 3.3% in 2006 to 2.2% in 2007 before reviving to 2.8% in 2008. But, despite the size of the US economy and its close linkages with the rest of the world, the global economy is likely to steam ahead. Why?

Because deceleration in the US will be because of US-specific factors, chiefly the slowdown in housing, which has relatively little impact on the rest of the economy. In the past, US economic slowdowns impacted significantly on the rest of the world only when the factor responsible for- say, the collapse of IT boom in 2002 or the oil shock of 1974- was common to the rest of the world as well.

For a detailed exposition on the subject, see my latest ET column.

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