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Growth woes in the West getting worse?

22 Jul 2014 - {{hitsCtrl.values.hits}}

Global activity in the 1st quarter strengthened and was expected to improve further, according to the April 2014 WEO, with much of the impetus for growth coming from advanced economies.

Although downside risks have diminished overall, lower-than-expected inflation poses risks for advanced economies, there is increased financial volatility in emerging market economies, and increases in the cost of capital will likely dampen investment and weigh on growth.

Furthermore, The International Monetary Fund appears to believe economic momentum has slackened since April. IMF Managing Director Christine Lagarde in a speech at the annual Davos in Provence meeting in France pointed out that while we are seeing global activity pick up, but the momentum could be less robust than expected because potential growth is weaker and investment remains lackluster,” Lagarde was also quoted as saying in its most recent World Economic report, that global growth could rise from 3 percent in 2013 to 3.6 percent in 2014 to 3.9 percent in 2015. Its chief apparently did not indicate in her speech the size of the hinted downward revision in her organization’s overall projections. However, Lagarde did estimate China’s economic growth would be between 7 percent and 7.5 percent this year, according to In April, the IMF’s comparable figure was 7.5 percent, which would suggest its outlook for the world’s second-largest economy has reduced by as much as 50 basis points since then. “Despite the many responses to the global financial] crisis, recovery is modest, laborious, fragile and measures to boost demand, despite the goodwill of Central Banks, will find their limits,” Lagarde said at the meeting in Aix-en-Provence. “We must therefore take steps to boost efforts to strengthen growth.”

Aggressive investments
Acknowledging the need in a number of countries to relaunch their investments, Lagarde warned it should be done “without threatening the viability of public finances.” She was clear that increased public investments were currently options not for all nations but for some of them. In the U.S., she indicated, growth should accelerate as long as the Federal Reserve’s move from looser to tighter monetary policy is orderly and there is a precise intermediate-term budget framework. In the euro area, she suggested, the 18-member bloc is slowly coming out of recession and it is crucial that those countries continue to carry out reforms, including completing the banking union.

Asian region
Although the Asian region is better prepared for currency and balance of payment crises than it was a decade ago, high levels of financial, trade and investment integration with the Western economies leave no country immune to the growth woes in the West.

However, unlike before the Asian region is better prepared for currency and balance of payment crises than it was a decade ago, having instituted wide ranging reforms, improved current account balances and built up a protective buffer of foreign exchange reserves. Therefore, the slowdown in the West arising from the European sovereign debt crisis will exert significant downward pressures on growth in the region. There are a number of potential and economic vulnerabilities that raise serious concerns and need to be tracked carefully by the emerging economies in Asia.

FDI flows
The macroeconomic difficulties for most economies of the West, once again, will put pressure on the movement of short-term portfolio capital. During times of generalized international risk aversion, short-term portfolio capital exits in developing countries.

Hence efforts aimed at preventing excessive currency depreciation reduce the availability of reserves to cover external short-term debt repayments and current account deficits. Another potential vulnerability stems from the financial services sector although most Asian economies possess adequate reserve cover for external short-term debt at a macro level.

However in some cases, some of the smaller economies may run the risk of being overly dependent on foreign sources for their borrowing. The growth crunch may result in governments coming under increased pressure in continuing to fund their development activities at high commercial rates.

Trade and tourism
A third source of vulnerability is the region’s dependence on trade and investments with developed countries.

Even though regional trade has been growing impressively, it generally consists of raw materials, parts and components in the manufacturing sector.

To a very large extent these exports are linked to demand for final consumer products in developed countries. The economic challenges in many developed countries will therefore before long find its way back to the region through a drop in trade, investments and tourism. Due to the convergence of the political and economic crises in the West, Middle Eastern incremental impacts must be taken into account from now on when developing countries in Asia devise policy responses to these emerging economic challenges post 2014.

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Growth woes in the West getting worse?

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