Why in news?
International Monetary Fund’s (IMF) recently released World Economic Outlook.
What is secular stagnation?
- Many economists believe that the world economy was in the grip of ‘secular stagnation’
- It is an expression coined by the economist Alvin Hansen in the 1930s.
- Hansen argued that where savings substantially exceed investment, the real interest rate tends to drop to a very low level.
- Conventional monetary policy operates by reducing nominal interest rates in order to stimulate growth.
- Where the nominal interest rate is already close to zero, there isn’t much scope for cutting interest rates.
- In conditions of ‘secular stagnation’, conventional monetary policy is doomed to be ineffective.
- The burden of reviving growth in such a situation falls on fiscal policy.
- This means running up large government deficits and increasing public debt.
- But markets will finance government borrowings only up to a point.
- There is also resistance among policymakers to increased government spending.
What is the present world economic scenario?
- This seemed to be an accurate description of the world economy in recent years.
- The real interest rate had been falling for several years.
- This was because savings were rising and investment was falling.
- Higher savings flowed from factors such as greater inequality, greater life expectancy and reduced post-retirement benefits.
- Investment had fallen because capital goods had become cheaper.
- With decreased spending, inflation rates also fell in the advanced world.
What are the findings of IMF?
- The prospects for the world economy have improved.
- The world economic growth accelerates from 3.1% in 2016 to 3.5% in 2017, and 3.6% in 2018.
- Growth in advanced economies is projected to rise from 1.7% in 2016 to 2% in 2017 and 2018.
- Emerging markets will grow at 4.5% in 2017, and 4.8% in 2018, compared with growth of 4.1% in 2016.
- China will see growth decelerating from 6.7% in 2016 to 6.6% and 6.2% in 2017 and 2018, respectively.
- India’s growth, in contrast, will accelerate from 6.8% in 2016 to 7.2% and 7.7% over the next two years.
- The IMF also warns that high income inequality is likely to persist.
- The IMF warns that emerging markets, including India, will find the external conditions for growth less supportive than in the post-2000 period.
- Tightening monetary conditions in the advanced world spell lower capital flows.
Source: The Hindu