In one of its starker revisions, the International Monetary Fund on Tuesday now says the “impulse to global growth” once again rests with the United States, while the larger developing countries face potentially permanent limits on expansion. The fund reduced its forecast for global economic growth this year to 2.9 percent, from the 3.2 percent it predicted six months ago, and said the world seemed stuck in “low gear.”
It’s a development of deep consequence. In the nations most affected by the slowdown, hundreds of millions of people are still in poverty, and at current growth rates they may well stay there. That affects nations such as the United States, whose major exporters have banked on the boom in emerging markets to keep rolling.
It also upsets some of the conventional wisdom of recent years. Once again, for example, it may be up to U.S. consumers to spend the world back to economic health.
“Is the BRICS party over? To some extent the answer is yes,” Nariman Behravesh, chief economist for the IHS consulting group, said of the informal bloc of countries, including Brazil, Russia, India, China and South Africa, that was once seen as a challenge to the United States’ economic leadership. “Markets are waking up to some of the more structural and fundamental problems in these economies.”
The drop is dramatic. Economies that as a group were forecast to be on pace to double in size in about a decade are now expected to grow at only half that rate. China is edging toward the 7 percent growth rate that policymakers consider the minimum needed to keep raising incomes in the world’s largest country. Brazil, Russia and South Africa are forecast to grow this year at rates not that much ahead of the United States. India, with the world’s largest concentration of people in extreme poverty, faces not just a growth downturn but also government budget constraints and other problems that prompted some experts to warn of a potential crisis in the making.
The United States is dealing with the government shutdown, the standoff over raising the debt ceiling and an expected
shift in Federal Reserve policy, all threatening to dent the recovery. But the fund backs up the findings of other researchers who feel the United States is edging toward a more robust recovery. Households are less indebted. Shutdown notwithstanding, the impact of tax hikes and spending cuts should abate. Corporations are strong. The jump in energy production is helping reduce the country’s overall deficit with the rest of the world — a shortfall that may be on pace to disappear in coming years.
That on its own is a turning of the tables from the pre-crisis years, when some analysts viewed America’s large current account deficit and China’s large current account surplus as evidence of an unstable system. Many of those “imbalances” have narrowed.
The concern now is whether what’s happening in the Indias and Brazils of the world is permanent or cyclical.
Analysts cite temporary forces, such as a European recession that has cut into its imports from around the world. Growth was so rapid in the years before the crisis that some slowing was not only expected but also “warranted,” IMF first deputy managing director David Lipton said during a panel on Tuesday.
But there is also a sense of permanent constraints setting in. Economists speak of a “middle income trap” — in this case when a developing nation’s rising income gets stuck at a point where it can’t compete with either rich countries’ technical advances or poorer nations’ cheap labor costs.
It may be starting to bite with a vengeance. In China and Russia, “time is running out” on their economic policy approach, while India and Brazil need major changes in how they regulate businesses and trade with the rest of the world, the IMF said.
In the heyday of the BRICS, it was assumed that those nations would steadily gain on the developed world, with incomes and living standards converging toward a new and higher global norm. The last year has made it plain that “convergence is not guaranteed,” Christian Deseglise, managing director for HSBC, said at an IMF conference on emerging nations. “We are coming to a head for some important countries to tackle the headwinds in front of them.”