A widening and deepening global recession

Any doubts about the world economy experiencing a downturn and the U.S. having entered a recession have been dispelled by three sets of forecasts/statements made in the past ten days by the International Monetary Fund, the Organisation for Economic Co- operation and Development and most recently by the National Bureau of Economic Research (NBER) of the U.S.

The IMF, which unfortunately is fast acquiring an alternative title of being the 'international fund for downward revision of economic forecasts,' presented, on November 19, its new estimates of world economic growth in the aftermath of the terrorist attacks in the U.S. There are three main features of these figures. First, world output is forecast to grow at 2.4 per cent in 2001 as well as 2002. While this is an expansion and not contraction, it meets the IMF criteria of a recession - annual economic growth that is less than 2.5 per cent. Second, the IMF has revised downwards its late September estimates for all regions and for the developed and developing countries. The downward revisions are, however, the sharpest for the developed countries. The developing countries are still expected to expand by 4 per cent in 2001 and by 4.4 per cent in 2002. Third, and most worrying, the IMF as recently as September was optimistic that the economic downturn would be shallow, confined to 2001 and that there would be a definite rebound in 2002. The new figures dismiss such optimism. The U.S., the European Union and Japan are expected to see a worsening, not an improvement, of economic growth in 2002.

The OECD paints much the same pattern in its estimates of growth in the advanced and middle-income countries, even if the details are slightly different from the IMF. GDP in the OECD countries is expected to grow this year by a mere one per cent, and remain at this level in 2002. The U.S. and Japan will see, in the first half of 2002, a contraction in their GDP, though the U.S. should witness a strong rebound in the second half of the year. However, as in the IMF estimates, all the three major blocs - the U.S., the E.U. and Japan - will experience slower growth in 2002.

The NBER's analysis is restricted to the U.S. and is more of a scholarly exercise. The panel of NBER economists comes to the conclusion that there was ``a significant decline'' in U.S. economic activity, as early as in March 2001, that is, six months before the terrorist attacks in the U.S. which created insecurity about the economy. The NBER study is based on the trends in a number of monthly indicators such as employment, industrial production and personal incomes. This is still not an ``official'' verdict of the U.S. having entered a recession - which is defined in that country as two successive quarters of negative growth - but the NBER panel is of the view that it will be shown to be so when the GDP growth figures for the fourth quarter of 2001 become available. The U.S. growth in the third quarter was negative.

A few general observations can be made based on these estimates. First, the downturn began well before the terrorist attacks disrupted the world economy. The depth of the downturn was only accelerated by the September 11 incidents. Second, while the boom of the late 1990s was largely concentrated in the U.S., the slowdown has spread all over the globe. Neither the E.U. nor Japan is able to compensate for the U.S. recession. Where does this leave India? Exports will obviously be a casualty - as they have already become in 2001 - in 2002 as well. (The OECD forecasts that world trade will expand this year by just 0.3 per cent and in 2002 by a little over 2 per cent.) The low price of oil, however, gives some respite to India's balance of payments. But where overall GDP growth is concerned, the prospects for the Indian economy are worsening and not improving. India will have to look more at domestic sources for an economic revival. It may claim to be, after China, the fastest growing economy in the world. But a faltering growth rate which is expected to dip below 5 per cent is not much to be proud about.

CRR

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