China, India Race Ahead in GDP Growth

It's Boom Time for
Global Economy

It's boom time for the world economy. All economic indicators and forecasts point to this heartening development. The overall economic growth in 2007 will be robust, but slightly slower than in the previous year. Of course, pockets of poverty persist in poorer countries. However, The latest reports on the state of the world economy by both the International Monetary Fund (IMF) and the World Bank make a healthy forecast for 2007. A robust trend such as this is visible almost after four decades.

 

The IMF's World Economic Outlook (WEO), published recently, predicts that the average world growth rate of 4.9 percent in the period 2003-2006 will continue at least for the next two years. According to IMF statistics, the only stronger spurt was the period 1970-1973, when world growth averaged 5.4 percent. If the current rate is sustained it will represent the most powerful six-year expansion of the world economy in the period since 1970. The conclusions of the Global Economic Prospects report, published by the World Bank in December 2006, are not essentially different. While its figures are slightly below those of the IMF, due to different measurement techniques, the World Bank points to a “strong global performance” reflecting a “very rapid expansion in developing countries, which grew more than twice as fast as the advanced economies.”
This was not just a result of the impact of the Chinese economy, which grew by 10.4 percent, but extended across the range of developing countries. Altogether 38 percent of the increase in global output originated in these regions, well above their 22 percent of world gross domestic product (GDP).
The World Bank noted that if the past 25 years were divided in two periods1980-2000 and 2000-2005average growth in developing countries had accelerated from 3.2 percent in the first period to 5.0 percent in the second. While this acceleration was not shared by all countries, neither was it merely the result of increased growth in China and India.
The IMF's WEO was filled with similar reports of economic success. Economic activity in Western Europe had “gathered momentum” in 2006 with GDP growth in the Euro area reaching 2.6 percent, almost double the rate for 2005 and the highest figure since 2000. “Germany was the principal locomotive, fuelled by robust export growth and strong investment generated by the major improvement in competitiveness and corporate health in recent years,” it stated. Overall the unemployment rate had fallen to 7.6 percent in the Euro area, its lowest level for 15 years.
There was even good news from Japan, where the economy was virtually stagnant for more than a decade following the collapse of the share market and real estate bubble in the early 1990s. Despite an unexpected decline in consumption in the middle of 2006, the “economy's underlying momentum remains robust with private investment expanding supported by strong profits, improved corporate balance sheets, and the resumption of bank lending and rising export growth.” Real economic growth in Japan was expected to remain at above 2 percent.
While the growth rate in Latin America was expected to ease to 4.9 percent this year, from 5.5 percent in 2006, the years 2004-2006 were “the strongest three-year period of growth in Latin America since the late 1970s.”
In so-called “emerging Asia” economic activity “continues to expand at a brisk pace”, supported by “very strong growth in both China and India.” In China, real GDP expanded by 10.7 percent in 2006, while in India the growth rate was 9.2 percent, the result of increased consumption, investment and exports.
Growth in Eastern Europe accelerated to 6.0 percent in 2006, while in Russia the growth rate of 7.7 percent in 2006 was expected to ease only slightly to 7.0 percent in 2007 and 6.4 percent in 2008.
The report described the economic outlook for Africa as “very positive” against a backdrop of strong global growth, increased capital inflows, rising oil production in a number of countries and increased demand for non-fuel commodities. “Real GDP growth is expected to accelerate to 6.2 percent this year, from 5.5 percent in 2006, before slowing to 5.8 percent in 2008.”
Concern over US Economy
One area of immediate concern was whether this expansion in the rest of the world would be pulled back by the slowing of the US economy due to the significant decline in the housing market. Latest figures showed that housing starts and permits were still headed downwards, with stocks of unsold new homes at their highest levels in 15 years. It has been estimated that over the last three quarters of 2006 the sharp contraction in residential construction took an average of 1 percentage point off real GDP growth in the US.
With the US economy having “slowed noticeably over the past year”, the central issue concerning the IMF was “whether this weakness in growth is a temporary slowdown ...or the early stages of a more protracted downturn.” It concluded that a “growth pause still seems more likely at this stage than a recession”. While the growth forecast for the US has been lowered to 2.2 percent (compared to a prediction of 2.9 percent last September), the economic expansion was “expected to gradually regain momentum, with quarterly growth rates rising during the course of 2007 and returning to around potential by mid-2008.”
Both the IMF and the World Bank pointed to the integration of the global markets, the opening up of the economies of China and India, the expansion of the world labour supply and the impact of information and communications technology as the main factors behind the upturn in world economic growth.
According to the World Bank, over the last quarter century, a time of unprecedented integration for the global economy, sharp falls in transport and communications costs, together with reductions in barriers to trade, have paved the way for productivity increases associated with the integration of emerging markets into global markets.