By TT Ram Mohan

Look out for another year of lacklustre growth for the world economy.

The World Bank has cut its forecasts for growth for the global economy for 2016 as well as its estimate for 2015. In 2015, the world economy grew at 2.4%, down from 2.6% in 2014 and lower than the forecast of 2.8% made in June.

In 2016, things won’t get a lot better. The Bank pegs growth at 2.9% but this could go for a toss if the present turbulence in the financial markets continues.

One thing is crystal clear: the world economy has done a 180 degree turn since the early years of the financial crisis. Then, the developed countries sank but the emerging economies chugged along. There was much talk of “decoupling”- how the emerging markets’ fortunes would be disconnected from those of the advanced world.

In Brics, all economics face major challenges except for India (relatively speaking).

Now, things have changed. The advanced economies (as a group) have bounced back. It’s the emerging markets that are sputtering. In BRICS, all economics face major challenges except for India (relatively speaking). In 2010-14, the major advanced economies contributed 0.7 percentage points to world growth; in 2015-18, they are poised to contribute 0.9 percentage points.

BRICS

In 2010-14, the major advanced economies contributed 0.7 percentage points to world growth; in 2015-18, they are poised to contribute 0.9 percentage points | Photo Courtesy: GovernmentZA via Flickr

Still, 2.9% growth does not constitute a crisis by itself- in 1993-2000, the world economy grew at 3.4%, so a drop of 0.5 percentage points should not cause panic. As I have been saying repeatedly, the problem we face today is not entirely economic. It’s not China’s slowing down or crashing stock markets there that pose the major problem.

Rather, the problem is that weak economic growth is happening at a time of worsening geo-politics. This can cause financial turbulence that is out of all proportion to fundamentals. We could have major funds simply dumping securities in emerging markets and fleeing. Then, a manageable problem becomes an unmanageable one.

Why do I say that? Well, FT columnist Gillian Tett reports that Nevsky Capital, an emerging markets specialist is closing shop. This is a fund that has produced annual average returns of 18% since inception! Why are they shutting down?

Martin Taylor, Nevsky’s co-founder, thinks the world economy is subject to so much political risk that “it is more difficult than ever before for us to accurately forecast macroeconomic and corporate variables”. …..Moreover, it is not alone in drawing in its horns: several high-profile funds, including BlueCrest, Seneca, LionEye and Lucidus Capital have recently done likewise. They have all presented their decision in slightly different ways but all point to a common theme: markets are becoming so unpredictable that tried and tested strategies are breaking down.A world shaped by irrational politics and capricious policies — in the west as well as in China and other emerging markets — is not something modern investors are equipped to deal with.

So, the real source of the problem, it would appear, is leaders in the west ratcheting up tensions with respect to Russia, China and the Middle East. They do so in the knowledge that the outcomes are relatively benign for themselves and bad for Russia, China and the Middle East. In other words, good for us (the west), bad for the rest. It’s the political economy, stupid.


TT Ram Mohan is a Professor, Finance and Accounting Area at Indian Institute of Management Ahmedabad.

This article was first published on The Big Picture.

Featured Image Credits: Max Hamer via Flickr

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Posted by The Indian Economist