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Slack industrial growth to be short-lived

BS Bureau

A day after the gloomy news of industrial growth plunging to 0.6 per cent in February - the second lowest in the last five years - here's some hope for developing countries like India.

In its report on global development finance, the World Bank has said the period of slower industrial output growth is expected to be relatively short-lived. Rapid recovery in high-tech sectors (hit hard by a downturn in the global semi-conductor cycle), lower interest rates, tax reduction, and some softening in the oil price should underpin a rebound in industrial country growth toward 3 per cent over 2002-2003.

Developing and transition countries' output is anticipated to rise toward 5 per cent in these years, supporting world GDP growth at rates around 3.3 per cent, the report said.

The report, however, holds out little hope for the year 2001. A sharp slowdown in economic activity, primarily in the US and East Asia, is anticipated to carry world GDP growth from its decade-high advance of 4 per cent in 2000 to 2.2 per cent in 2001. Industrial country growth should slow from 3.6 per cent to 1.6 per cent, and growth in the developing and transition economies from 5.4 per cent to 4.2 per cent.

The report argues that a recovery next year from the current slowdown is more likely than prolonged slow growth, because economic cycles have become shorter and because the scope for policy adjustments (fiscal and monetary stimulus) is greater.

It, however, warns that the possibility of a continued feedback from financial markets to the real economy may delay the recovery.

The slowdown is expected to differ in magnitude across developing countries, creating both risks and opportunities.

A harder-than-expected landing in the industrial world would have serious consequences in many developing countries but could bring some partially offsetting benefits, such as lower interest rates. Even in the more likely soft landing scenario, some sectors and countries will be hit hard.

On foreign direct investment, the report says FDI to developing countries declined modestly (by 4 per cent) for the first time in a decade, reflecting a slowing in merger and acquisition activity and the completion of large-scale privatisation projects.

The World Bank said the cyclical slowdown of the global economy that began towards the end of 2000 has been significant because US equity markets, consumer confidence, and short-term economic prospects have all dropped sharply and in tandem.

A rebound in the course of this year seems possible due to the available policy instruments for stabilisation.

World trade growth is likely to be more than halved from its record 13 per cent advance in 2000 to 5.5 per cent in 2001, and to stabilise thereafter at still robust rates of more-than 7 per cent.

Diminished demand will require Organisation of Petroleum Exporting Countries to reduce oil production in order to maintain prices within their target range of $22 to $28 per bbl.

Oil prices are expected to average $25 per bbl in 2001, easing to $21 and $20 per bbl in 2002-2003 respectively. Recovery in non-energy commodity prices will be postponed until 2002, falling by 0.3 per cent in 2001 before advancing at 5.5 per cent annual rate during the years following, the report says.

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