It's a small world

The big hope that many have for global growth not slowing too much is that, while the US will slow, the slack will be picked up by both the Eurozone as well as Japan. A presentation at ICRIER by Joshua Felman, the IMF’s senior resident representative in India, suggests this may not be true. For one, says Felman, industrial output has been falling in the Euro area and Germany will be raising VAT levels next year as well. As for Japan, consumption growth there is also very weak, which is why third quarter GDP growth there has fallen somewhat – while consumption grew 1.5 per cent in Q2 2006, it fell 1.75 per cent in Q3 – and recent economic growth is primarily driven by net exports. Besides, since there is a strong correlation between GDP growth and exports in both areas, and the US is a big driver of these exports, a US slowdown would automatically hit both the Eurozone and Japan. The 2001 US slowdown, in fact, reflected just this – while US growth fell from 3.7 per cent in 2000 to 0.8 per cent in 2001, Eurozone growth fell from 3.9 per cent to 1.9 per cent, and Japan from 2.9 per cent to a mere 0.4 per cent.