Posted by: Richard | May 2, 2010

IMF – New World Economic Outlook Lecture

A great part of the Sloan Fellowship is the involvement of the community of the London Business School.  A great example of access to thought leadership was a presentation last week by Prakash Kannan and Ravi Balakrishnan of the IMF.  Ravi and Prakash are the authors of the New World Economic Outlook, an analysis of what is going on in the world.  Over the course of an hour, Ravi and Prakash took us through their view of the global economic outlook and some of the concepts that lead to their viewpoint.

Now, this is a great opportunity to hear thought leaders talk.  Even better is the involvement of LBS Economics Profs – Andrew Scott, Paolo Surico, Richard Portes and Nicolas Coeurdacier, all of whom grilled the IMF economists after their presentation.  Finally, an open floor allowed for the group of students to ask questions about the lecture.

As background to the lecture, the basic premise is that the world economy is improving, however the trend is uneven.  Asia is responding rapidly, whereas Western nations are still quite sluggish.  The outlook then is that Western countries will have a slower return to normal and the global economy will be driven by the Asian / Developing nations who are currently experiencing GDP growth of up to 10%!

This begged my question: What is the stimulus for Asian GDP growth in the future?  In the past their robust growth was based on Western demand (fuelled by credit) for consumer durables. Over the past year, tremendous stimulus been extremely successful (so much so that there are fears of inflation, asset bubbles and over-built capacity).  How is growth generated in the future?  This is a real question, with indebted Western consumers who have to pay off personal and governmental debt plus a reduction in Asian stimulus spending.  Thankfully, this question wasn’t dodged (though a further question from another classmate about overbuilt infrastructure (factories) in Asia specifically was not answered).

The answer: While Western demand has dropped, there still is demand that is resulting in Asian growth.  Added to this is more robust government spending in Developing economies. Finally, internal demand will start to cause developing economies to grow.   So while the past had two extremes, the future sees a mix of these extremes and increasing internal demand.

I’m sceptical about this option for several reasons.

1. We have gone through a technology boom with dramatic changes in computers, electronics, televisions and monitors.  At this point, the degree of change from new products is diminishing.  People can get by with their existing LCD monitors, 2008 computers and 42″ flat screen TV. With debt repayment comes compromises, and I think the technology fuel of the past decade is now producing products with less marginal utility over current products.  Does this mean that consumers will dry up?  By no means, but I see a drop in spending while people get their finances in order.

2. I am unsure about the growth in internal demand within developing economies.  It seems very fortunate that internal demand will pick up precisely when foreign demand drops.  Perhaps too fortunate, and this timing may not be realized.

3. Projected rises in developing nations currencies will hurt competitiveness and potentially reduce growth.  This will be compounded by increasing commodity prices that will help to reduce the labour cost gains in outsourcing production to developing countries.

4. Uncertainty as to how long governments can keep on spending to continue growth.  As governments withdraw stimulus spending there is a lot of  hope that Western and local businesses pick up the slack to keep economies growing.  Obviously this timing issue could result a drop in growth.

My final conclusion is that there is a lot of hope that the timing of aspects of growth will match opposing drops in growth.  Developing nations are on great paths to growth, however they haven’t experienced a significant dip in a long time.  Unfortunately, there are enough issues that lead me to believe that a drop in growth (perhaps only down to 5%, perhaps lower) are on the horizon.

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