World Economic Outlook

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