Still an Uneven Global Recovery

By Dr TK Jayaraman The World Economic Outlook (WEO) Update released last week by International Monetary Fund (IMF) brings no cheer. In addition to slow recovery in advanced countries and
02 Aug 2014 08:23

By Dr TK Jayaraman

The World Economic Outlook (WEO) Update released last week by International Monetary Fund (IMF) brings no cheer.
In addition to slow recovery in advanced countries and less optimistic outlook in the emerging economies, there are heightened worries.
The Ukraine crisis and Middle East tension would end up in sharp rise in oil price.
The IMF has lowered the April global forecast for 2014 to 3.4 per cent from 3.7 per cent. For advanced countries, the projected rate of growth of 2.2 per cent has been reduced to 1.8 per cent.
Thanks to Germany’s growth projected higher by 0. 2 per cent from 1.7 per cent to 1.9 per cent, Euro zone as a whole would grow at 1.1 per cent without any revision.
This is so, despite the forecasted decline in GDP growth rates of France and Italy. United Kingdom would grow at 3.2 per cent, higher by 0.4 per cent.
So too Japan’s projected growth has been raised by 0.3 per cent to 1.6 per cent.

America’s growth rate of 2.8 per cent has been revised downwards by 1.1 per cent to 1.7 per cent, due to severe winter and weak growth during January-March.
The latest news is US grew at an annual rate of four per cent during April-June.
Although central bank decided to reduce monetary stimulus by cutting its monthly bond purchases to US$25billion from U$35billion, it is expected the impact of severe winter would result in 2014 growth around 1.6 per cent- less than in 2013.
In other advanced countries, including Australia and New Zealand (NZ), there is no change in the projected growth rate of three per cent.
In regard to emerging economies, China’s projected growth rate has been lowered to 7.4 per cent from 7.7 per cent.
Brazil’s growth rate is reduced from 1.3 per cent to 0.7 per cent in view of its declining business confidence.
Russia’s growth rate is slashed to just 0.2 per cent from 1.3 per cent, following the Ukraine crisis and sanctions imposed by USA and Germany.
Reduction in South Africa’s growth rate projection (from 1.7 per cent to 1.1 per cent) is due to a prolonged strike by miners. The growth rate projected for India at 5.4 per cent remains unchanged.

Concerns to PICs
The growth rates of two countries are of importance to Pacific island countries (PICs).
They are Australia and NZ, the crucial trading partners and sources of aid and remittance inflows.
Appreciation of their exchange rates creates favourable conditions for increased tourism to PICs, including Fiji.
The kiwi dollar appreciated 7.7 per cent over the past year mainly driven by the country’s terms of trade (ratio of prices to import prices) and by reserve bank’s action of increasing the official cash rate to 3.5 per cent, the highest in five years.
The latest news of falling Chinese house prices is not good news for NZ. It would result in decreased demand for NZ exports, including milk.

Kiwi depreciation
The result would be depreciation of the kiwi dollar. A big fall from the current rate (NZ$1 = US$0.87) would mean less number of tourists to Fiji and other PICs.
Australian output growth is forecast at three per cent. World prices of those minerals important to Australia from export earnings point of view have declined, affecting growth in the short term.
Although domestic consumer demand has improved and there is strong expansion in housing construction, Reserve Bank of Australia (RBA) expects growth to be a little below trend over the year ahead. The exchange rate remains high by historical standards.
Exporters want RBA to cut interest rate. They would like a fall in exchange rate.
However, exchange rate appears to be correct by Big Mac standard, an invention popularized by The Economist of London. If we go by its price at US$4.80 in USA, at the prevailing exchange rate, its Australian price in US currency is U$4.81.
The overvaluation is negligible: just 0.4 per cent. There is no interest rate cut contemplated by RBA. Strong Kiwi and Aussie dollars are good for PICs. That will make tourism to Fiji attractive.

Fiji situation
A high rate of domestic investment dominated by public sector investment and accompanied by strong tourism and remittance flows, helped the economy record positive growth rates.
In per cent they were three in 2010, 2.7 in 2011, 1.7 in 2012 and 3.6 in 2013. Fiji’s growth rate forecast for 2014 is 3.8 per cent.
Whether this trend would be kept up and whether private investment would rise from the current, subdued level depend upon the policies of the new government after the elections.
nDr Jayaraman is a Professor at the Fiji National University’s School of Economics, Banking and Finance, Nasinu Campus. His website is:

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