World economy is yet to recover from low-growth syndrome (The Hindu)

Mains Paper 3: Economy
Prelims level: Not much
Mains level: Low growth syndrome effect in world economy

Context:

• The negative impact of the novel coronavirus epidemic and the potential positive effect of the truce reflected in the ‘Phase 1’ trade deal between China and India.
• The role that the country plays in driving global growth has increased concern that the adverse impact the epidemic will have on China’s economy will spill over globally.
• On the other hand, the trade deal between the US and China, while partial and limited, is viewed favourably because of the positive signals that sends out with respect to growth in global trade.

Global performance:

• Consider the US. Though President Donald Trump chose to counter the gloom at the recent Davos meeting of the global elite, claiming that under his watch the US economy has rebounded strongly.
• The news emerged that in the last half of 2019 the US economy had grown at just 2.1 per cent, as compared with the 3 per cent that the White House targets.
• For the full year 2019, growth is placed at 2.3 per cent, significantly lower than the 2.9 per cent recorded in 2018, which had ignited hopes of a final escape from low growth.
• US: In the early years after the 2008 crisis, when intervention by the Treasury and the Federal Reserve restored the financial system to solvency and provided a stimulus. But those signs soon gave way to a long period of slow growth, which has become the “new normal”.
• European Union: The crisis intensified with a delay, taking the form of a sovereign debt crisis. With Germany, too, being hit by depressed global demand, growth has decelerated sharply in recent quarters. While there was some sign of a return to reasonable growth rates in the quarters beginning early 2014, this could not be sustained.
• Japan: Quarterly growth rates were not just volatile but touched zero or negative levels in as many as 10 quarters.These trends in the core developed countries make clear that the locations where the financial crisis was most intense are yet to overcome the real economic setbacks that the former triggered.
• The impact of this on global growth has been compounded by the loss of momentum in China and India. The perception that these economies were decoupled from the rest of world and would compensate for poor or indifferent performance elsewhere, has turned out to be wrong.
• Growth in both economies has fallen significantly in recent quarters, resulting in a shift from moderate to low growth in the world economy.

Monetary policy:

• This generalised slowing of growth across the world economy is a matter for concern, because the developed countries’ policymakers claim that they have been consistently working on reversing the slowdown and raising growth. Their efforts have, however, had a narrow focus.
• Interest rates were reduced repeatedly and sharply, bringing them down to near zero and in some cases even negative levels.
• In addition, the central banks of developed countries opted for “quantitative easing” or large and regular bond purchases that infused liquidity into the economy.
• The understanding underlying the reliance on these options is that availability of easy and cheap credit would spur debt-financed investment and consumption, and raise the rate of growth. The persistence of low growth indicates that this presumption has proved to be wrong.\
• One reason for this was that because of depressed demand conditions as well as high leverage resulting from the burden of accumulated debt, the sensitivity of investment and consumption demand to the increased access to cheap liquidity was low.
• In the absence of a fiscal stimulus that could have raised employment and incomes and helped accelerate the process of deleveraging, monetary instruments were largely ineffective in ensuring a robust recovery.

Way ahead:

• The single-minded emphasis on use of monetary policy instruments, resulting in huge and wieldy central bank balance sheets and the persistence of zero or negative interest rates for far too long, has meant that the potential for the use of these instruments has been exhausted.
• The coronavirus shock and unresolved trade tensions now threaten to add to the troubles faced by the world’s policymakers.
• However, there are no signs as yet that they would revise their policy stance and use the fiscal lever, now that the reliance on monetary policy has run its course.

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Prelims Questions:

Q.1) With reference to the International Gandhi Peace Prize, consider the following statements:
1. It is awarded biennially by the Government of India.
2. The award carries ₹ 1 Crore in cash and open to all persons regardless of nationality, race, creed or gender.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both
(d) None

Answer: B
Mains Questions:
Q.1) How the global policy has not addressed effectively low growth brought on by the global financial crisis, which predates the new threats of unresolved trade tensions and shocks such as coronavirus? Comment.