The expansion of the BRIC economies has both advantages and disadvantages for Western countries. Their consistently high growth rates have created a much wider market place for Western firms and a much needed additional source of consumer demand, especially in times of recession. Countries such as China have had double digit growth rates, with others like India experiencing growth rates of just under 10%. But are these impressive growth rates now beginning to fall?
For the last 2 years, the growth rate in the Indian economy has been sub-5%, with growth in the 2013-14 financial year at 4.7%. Though some sectors, including agriculture have experienced buoyant growth, it is other sectors that have been holding this economy back. Manufacturing contracted at an annualised rate of 1.4% over the quarter, while mining contracted by 0.4%. With a growth rate of just under 5%, one might think that this was good – after all many Western economies have only recently entered positive growth. However, the Indian economy has a rapidly growing population and it is estimated that 10 million additional jobs each year must be created. It is this figure that requires such a high growth rate – estimated at around 8%. Thus, the sub-5% growth recorded for 2 years is insufficient to sustain the required job creation.
There are many factors that appear to be holding growth back. High inflation has been a problem for some years and the Indian currency has been relatively weak and volatile. Together, these issues have created an environment of uncertainty and if there’s one thing that investors don’t like, it’s uncertainty. This has therefore led to a lack of investment in the economy, which is a key component of aggregate demand and hence a key source of economic growth. Furthermore, interest rates rose last year, thereby pushing up the cost of borrowing and the rate of credit growth has also slowed. These factors collectively have led to lower foreign investment, domestic investment and spending, which have all contributed towards more subdued growth than in the past. Glenn Levine, a senior economist at Moody’s said:
India’s economy continues to grow well below potential as a combination of supply‐side constraints and the adverse effects of an underperforming government weigh on capital expenditure and hiring … It will be a while before the Indian economy is expanding above 6% again.
However, many economists remain optimistic about the prospects of Asia’s third-largest economy. Inflation appears to be under control and the currency has gained strength. Many believe that more investment supporting government policies will be the kick start the economy needs and this will in turn encourage firms to begin investment. It may be the new leader of this country, Narendra Modo, that will jump start the economy. The Prime Minister is expected to back policies to stimulate growth, who will direct more spending at infrastructure, simplify taxes and introduce policies to attract foreign investment. Adi Godrej, Chairman of the Godrej group said:
As soon as investors see the first signals of growth-supportive policies, you will see a definite turnaround on the ground.
The coming months will be crucial in determining how quickly the Indian economy is likely to see a return to near double digit growth. The new government has indeed promised policies to boost the economy, but the annual budget will confirm whether this promise is likely to be kept. Given the dependence of Indian jobs on a fast growth rate and the dependence of the Western world on the continued growth of the BRICs in creating a wider market for our exports, the fortunes of India are extremely important. The following articles consider this economy.
Indian economy grew at 4.7% in 2013-14 The Times of India (30/5/14)
India’s economic growth disappoints BBC News (30/5/14)
India’s GDP grows 4.7% in fiscal year, missing government forecast Wall Street Journal, Anant Vijay Kala (30/5/14)
India’s economy expands 4.7pct in fiscal year 2013/14 Reuters (30/5/14)
India’s economy still underwhelms CNN Money, Charles Riley, Alanna Petroff (30/5/14)
FY14 GDP growth at 4.7%; India sees worst slowdown in 25 years The Economic Times (30/5/14)
India growth below 5% adds pressure on Modi to spur investment Bloomberg, Unni Krishnan (30/5/14)
Jim Armitage: ‘Modinomics’ in India has helped growth, but not for all Independent, Jim Armitage (17/5/14)
Questions
- Using a diagram, explain how economic growth can be created through (a) demand-side measures and (b) supply-side measures.
- Why would higher interest rates reduce growth?
- Why does high inflation create uncertainty and what impact does this have on business investment?
- India has experienced a weak and volatile currency and this has contributed towards a lack of foreign investment and low growth. Using a diagram, explain why this could be the case.
- What sort of government policies would you recommend for the Indian economy if you had become the new Prime Minister and your primary objective was to boost economic growth?
- Why is the expansion of the BRIC economies, of which India is one, so important for Western economies?
The latest preliminary GDP estimates for 2014 Q1 suggest that the economy’s output (real GDP) expanded by 0.8 per cent following on the back of a 0.7 per cent increase in 2013 Q4. Growth was observed in three of the four main industrial sectors: 0.9% in services, 0.8% in production and 0.3% in construction. In contrast, output decreased by 0.7% in agriculture. The total output of the economy is now just 0.6 per cent below its 2008 Q1 peak with the output of the service sector now 2.0 per cent higher.
Data on growth need to be set in the context of the inherent volatility of economies and in this case in the context of 2008/9 recession. Then, output fall by some 7.2 per cent. UK output peaked in 2008 Q1 (£392.786 billion at 2010 prices). There then followed 6 quarters during which output declined.
Output declined again in 2010 Q4 (-0.2% growth), in 2011 Q4 (-0.1% growth), in 2012 Q2 (-0.4%) and in 2012 Q4 (-0.2%). A double-dip recession was only narrowly avoided with growth recorded at zero on 2012 Q1. The latest ONS numbers show the economy grew by 0.8 per cent in 2013 Q2 (to £381.318 billion at 2010 prices), by 0.8 per cent in 2013 Q3 (to £384.533 billion at 2010 prices), by 0.7 per cent in 2013 Q4 (to £387.138 billion at 2010 prices) and by 0.8 per cent in 2014 Q1 (to £390.235 billion at 2010 prices). Compared with 2013 Q1, the output of the UK economy in 2014 Q1 is 3.1 per cent higher.
Chart 1 helps to put the recent growth numbers into an historical context. It shows the quarterly change in real GDP since the 1980s. We can see the 5-quarter recession that commenced in 1980 Q1 when output shrunk by 4.6 per cent, the 5-quarter recession that commenced in 1990 Q3 when output shrank by 2.4 per cent and the 6-quarter recession that commenced in 2008 Q2 when output shrank by 7.2 per cent. (Click here to download the chart to PowerPoint.)
Chart 2 scratches a little below the surface by looking at output by the 4 principal industrial types. The interesting finding is that the output of the service sector has now risen above its 2008 Q1 peak. In 2014 Q1, service sector output was 2.0 per cent higher than 2008 Q1. The fact that total output remains 0.6 per cent lower can be explained by the lop-sided industrial recovery. Output in agriculture, forestry and fisheries remains 7.1 per cent lower, production (including manufacturing) 11.5 per cent lower and construction 12.2 per cent lower. (Click here to dowload the chart to Powerpoint.)
Data
Preliminary Estimate of GDP – Time Series Dataset Q1 2014 Office for National StatisticsGross Domestic Product Preliminary Estimate, Q1 2014 Office for National Statistics
Articles
UK GDP ‘close to pre-crisis level’ says NIESR BBC News (9/5/14)
UK ‘great recession’ almost over, says thinktank Guardian, Katie Allen (9/5/14)
UK economy tops its pre-crash high point, says NIESR Telegraph, Szu Ping Chan (9/5/14)
UK economy grew by 0.8% in first three months of 2014 Guardian, Katie Allen and Angela Monaghan (29/4/14)
Manufacturing is GDP star performer BBC News, Robert Peston (29/4/14).
Questions
- What is the difference between nominal and real GDP? Which of these helps to track changes in economic output?
- Looking at Chart 1 above, summarise the key patterns in real GDP since the 1980s.
- What is a recession? What is a double-dip recession?
- What are some of the problems with the traditional definition of a recession?
- Can a recession occur if nominal GDP is actually rising? Explain your answer.
- What factors lead to economic growth being so variable?
- What factors might explain the very different patterns seen since the late 2000s in the volume of output of the 4 main industrial sectors?
- Produce a short briefing paper exploring the prospects for economic growth in the UK over the next 12 to 18 months.
- Explain the arguments for and against using GDP as a measure of a country’s economic well-being.
- Analyse the role that the financial system might play in contributing to or alleviating the business cycle.
On my commute to work on the 6th May, I happened to listen to a programme on BBC radio 4, which provided some fascinating discussion on a variety of economic issues. Technological change is constant and unstoppable and the consequences of it are likely to be both good and bad.
In this programme some top economists, including Joseph Stiglitz offer their analysis of the impact of technology and how the future might look, by considering a range of factors, such as youth unemployment, the productivity of labour, education, pensions and inequality. The benefits of new technology can be seen as endless, but the impact on inequality and how the benefits of technology are being distributed is a concern for many people. The best introduction to the programme and its content is simply to reproduce the description provided by BBC radio 4.
The baby boom generation came of age when it was accepted knowledge that innovation and productivity would always lead to higher standards of living. The generations which followed assumed this truth would continue into the future indefinitely. With the crash of 2008 the upward mobility the middle classes assumed was their right evaporated, and it is unlikely to return.
Martin Wolf, chief economics commentator of the Financial Times, asks how the work force of the future will be changed by the advancements of technologies. How should governments respond to a jobs market which is hollowing out opportunities for traditional educated professions and how will rewards for innovation and income for labour be distributed without creating a society plagued by endemic inequality?
We will speak with optimists and pessimists on both sides of the argument to find out how the repercussions of these changes will affect the way we all live now and well into the future.
It is well worth listening to and provides some interesting insights as to what the future might look like, as the inevitable technological change continues. The link for the programme is below.
The future is not what it used to be BBC Radio 4 (6/5/14)
Questions
- What are the expected costs and benefits of technological change?
- Which factors are discussed as being the main obstacles to upwards mobility? Why have these become more prevalent in recent decades?
- Using a diagram, explain how technology can improve economic growth. To what extent is the multiplier effect important here?
- How is technology expected to affect the labour market? Use a diagram to help your explanation and make sure you consider both sides of the argument.
- What is meant by the idea that the benefits of new technology are likely to be felt in the long run?
- How important is education in creating equal opportunities?
- What is meant by secular stagnation? Is it seen as being a problem?
Rising inflation: not normally a cause for celebration, but that’s not the case for Japan. Having been subject to the spectre of deflation for many years, the 22-year high for the CPI at 2.7% is a welcome figure, even it is slightly lower than expected. This surge in prices is partly the result of a growth in domestic demand and a sign, therefore, that output will expand in response to the rise in demand.
The Japanese economy has experienced largely stagnant growth for two decades and a key cause has been falling prices. Although consumers like bargains, this has been problematic for this large economy. Deflation creates continuously falling prices and this means consumers hold back from purchasing durable goods, preferring to wait until prices have fallen further.
In the blog, Japan’s recovery, we looked at inflation data showing Japanese consumer prices growing at a faster rate than expected. This ‘positive’ trend has continued.
When it comes to inflation, expectations are crucial. If people think prices will rise in the future, they are more likely to buy now to get the lower price. This can therefore help to stimulate aggregate demand and it is this that has been the target for Japan. Part of the growth in the CPI is down to the sales tax rise from 5% to 8%. This was the first time in 17 years that the sales tax had increased. Further increases in it are expected in 2015. There were concerns about the impact of this rise, based on the depression that followed the last rise back in 1997, but so far the signs seem good.
Monetary easing was a key component in ending the downward trajectory of the Japanese economy and, following the sales tax rise, many believe that another round of monetary easing may be needed to counter the effects and create further growth in the economy and in the CPI. As the Bank of Japan Governor said:
There are various ways to adjust policy. We will decide what among these measures is appropriate depending on economic and price developments at the time … For now, we can say Japan is making steady progress toward achieving 2 per cent inflation.
One of the ‘three arrows‘ of the government’s policy has been to boost government spending, which should directly increase aggregate demand. Furthermore, with signs of the CPI rising, consumers may be encouraged to spend more, giving a much needed boost to consumption. The economy is certainly not out of the woods, but appears to be on the right path. The following articles consider the Japanese economy.
Japan CPI rises less than expected Wall Street Journal, Takashi Nakamichi (25/4/14)
Japan inflation may beat BOJ forecast Reuters, Leika Kihara (22/4/14)
Tokyo consumer price growth at 22-year high BBC News (25/4/14)
Japan inflation quickens to over 5-year high, output rebounds Reuters, Leika Kihara and Stanley White (31/1/14)
Japan’s consumer inflation set to reach five-year high Guardian (18/4/14)
Tokyo inflation hits 22-year high, inching toward BOJ goal Reuters, Tetsushi Kajimoto and Leika Kihara (25/4/14)
Tokyo’s core CPI got 2.7% lift in April from tax hike The Japan Times (25/4/14)
Is Japan winning the war against deflation? CNBC, Ansuya Harjani (25/4/14)
Questions
- Why is deflation a problem?
- Using an AD/AS diagram, illustrate the problem of expectations and how this contributes to stagnant growth.
- Use the same diagram to explain how expectations of rising prices can help to boost AD.
- Why is the sales tax expected to reduce growth?
- Why is another round of monetary easing expected?
- What government policies would you recommend to a government faced with stagnant growth and falling prices?
The IMF has just published its 6-monthly World Economic Outlook report. The report is moderately optimistic, arguing that ‘global activity has broadly strengthened and is expected to improve further in 2014–15’. World growth is expected to rise from 3.0% in 2013 to 3.6% in 2014 and 3.9% in 2015,
Much of the impetus for an acceleration in growth is expected to come from advanced countries. Growth in these countries is expected to average 2¼% in 2014–15, a rise of 1 percentage point compared with 2013. Part of the reason is that these countries still have large output gaps and thus have considerable scope to respond to rises in aggregate demand.
Monetary policy in advanced countries remains accommodative, although the USA has begun to taper off its quantitative easing programme. It is possible, however, that the ECB may make its monetary policy more accommodative, with signs that it might embark on quantitative easing if eurozone growth remains weak and if the risks of deflation rise. If the average price level in the eurozone does fall, this could dampen demand as consumers defer consumption until prices have fallen.
As far as emerging economies are concerned, growth is projected to ‘pick up gradually from 4.7 percent in 2013 to about 5 percent in 2014 and 5¼% in 2015’. Although predicted growth is higher in emerging countries than in advanced countries, its acceleration is less, and much of the predicted growth is dependent on rising export sales to the advanced countries.
Global growth, however, is still fragile. Emerging market economies are vulnerable to a slowing or even reversal of monetary flows from the USA as its quantitative easing programme winds down. Advanced countries are vulnerable to deflationary risks. ‘The result [of deflation] would be higher real interest rates, an increase in private and public debt burdens, and weaker demand and output.’
The UK is predicted to have the strongest growth (2.9%) of the G7 countries in 2014 (see above chart). But the IMF cautions about being too optimistic:
Growth has rebounded more strongly than anticipated in the United Kingdom on easier credit conditions and increased confidence. However, the recovery has been unbalanced, with business investment and exports still disappointing.
Articles
IMF: World economy stronger; recovery uneven USA Today, Paul Davidson (8/4/14)
Emerging markets feel the pressure The Telegraph, Szu Ping Chan (8/4/14)
IMF cuts downturn danger to near zero Financial Times, Chris Giles (8/4/14)
IMF warns eurozone and ECB on deflation threat RTE News (8/4/14)
Recovery strong but risk shifts to emerging markets: IMF CNBC, Kiran Moodley (8/4/14)
IMF: World economy is stronger but faces threats Bloomberg Businessweek, Christopher S. Rugaber (8/4/14)
IMF: UK economic growth to reach 2.9% in 2014 BBC News (8/4/14)
IMF: UK economic growth to reach 2.9% in 2014 BBC News, Hugh Pym (8/4/14)
Five signs that the global economic recovery may be an illusion The Guardian, Larry Elliott (6/4/14)
Report and data
World Economic Outlook (WEO) International Monetary Fund (8/4/14)
World Economic Outlook Database IMF (8/4/14)
Questions
- Why does the IMF expect the world economy to grow more strongly in 2014 and 2015 than in 2013?
- What are the greatest risks to economic growth for (a) advanced countries; (b) developing countries?
- What geo-political events could negatively affect economic growth in (a) the eurozone; (b) the global economy?
- In what ways is the UK’s economic growth unbalanced?
- How much credence should be given to economic forecasts?
- Should countries’ economic performance be judged primarily by their growth in GDP?
The expansion of the BRIC economies has both advantages and disadvantages for Western countries. Their consistently high growth rates have created a much wider market place for Western firms and a much needed additional source of consumer demand, especially in times of recession. Countries such as China have had double digit growth rates, with others like India experiencing growth rates of just under 10%. But are these impressive growth rates now beginning to fall?
