Christine Lagarde, the managing director of the International Monetary Fund (IMF), warned in the latest World Economic Outlook (WEO) that the risk of a “new mediocre” prolonged slow growth is a challenge to the global economy. The trend is particularly evident in the advanced economies, where recovery is concentrated among a few countries, while the others are still struggling to return to their precrisis growth rates. The emerging markets, despite their robust growth outlook, are no exception. Read more: http://bit.ly/1xnjD7F

1. 13 Nov 2014
The "New Mediocre" for the Global Economy
Christine Lagarde, the managing director of the International Monetary Fund (IMF), warned in the latest World Economic Outlook (WEO)
that the risk of a “new mediocre” prolonged slow growth is a challenge to the global economy. The trend is particularly evident in the
advanced economies, where recovery is concentrated among a few countries, while the others are still struggling to return to their pre-crisis
growth rates. The emerging markets, despite their robust growth outlook, are no exception.
For the major advanced economies, the recovery is mainly driven by North America and the United Kingdom, while the euro area and
Japan are still living under the shadow of the crisis. North America and the United Kingdom developed at rates close to pre-crisis levels
in 2013 (Canada: 2.0%, US: 2.2%, UK: 1.7%). This momentum is expected to continue; forecasts for 2015 are optimistic at respectively
2.4%, 3.1% and 2.7% for the three economies. The recovery in the euro area and its major economies is still bleak. The euro area as a
whole had negative growth in the last two years, at -0.7% in 2012 and -0.4% in 2013. Japan, while growing steadily at a rate of 1.5% last
year, has a questionable upside potential. The IMF projects that it will have a prolonged slow growth rate below 1% from 2014 to 2018.
All these countries are foreseen to be lagging behind the advanced economies’ average growth during 2014 to 2019. This observation
underpins the theory of “new mediocre” growth, where dull performance seems to be the norm.
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In terms of the emerging markets, the growth trends are also sub-par to their pre-crisis
levels and are expected to stay “mediocre”. In particular, Emerging and
Developing Asia is projected to grow at an annual rate ranging from 6.3% to 6.6%
after 2014. Although robust, it is a significant drop from the pre-crisis levels, where
the growth rate significantly increased from 8.3% in 2003 to 11.2% in 2007.
China’s recent slowdown, with an estimated growth rate of 7.4% for 2014, has
raised concerns regarding its growth sustainability. The nation, with its impressive
track record during the early 2000s, is projected to display diminishing growth,
and to be caught up by India in 2018 in terms of its GDP growth rate.
The slowdowns observed in the emerging markets lead to concerns of a “middle-income
trap”, where fast growing countries become trapped and fail to move to a
high-income status. Low investment is one of the possible causes for the middle-income
trap observed in Developing Asia. The gross investment-to-GDP ratio in
some ASEAN countries such as Malaysia (26.1%) and the Philippines (19.7%) is
much lower than the 2013 average of 31.6% for the emerging markets and
developing economies (EMDE). The Philippines’ investment ratio is the lowest
among the ASEAN-5. Also, it is worth noting that Vietnam’s ratio dropped
significantly from 35.7% in 2010 to 26.6% in 2013.
Countries with higher investment, India for instance, may face a different set of
challenges, such as slow industrial output growth. The average year-on-year
change of the Industrial Production Index in India was 0.6% in 2013, while it was
15.7% in 2007, which is one of the reasons for the slowdown in the country.
Despite these potential threats, the Ifo World Economic Survey index for Asia,
representative of the overall economic situation for the next six months, measured
6.4 points out of 9 in the third quarter in 2014, meaning there is still reasonable
optimism for the region’s outlook.
To avoid the “new mediocre” notion from being prevalent, bolder policies
stimulating organic growth and employment could be used to trigger a “new
momentum”, Lagarde suggests. An infrastructure push, discussed in the WEO
report, would be a timely boost for the emerging markets. In the developing East
Asia and Pacific regions, the World Bank World Development Index (WDI) data
show that investment with private participation in energy and transport was
significantly hampered by the Asian financial crisis in 1997 and the global
financial crisis in 2008. Investment in infrastructure will not only stimulate the
recovery via job creation, but will also improve the fundamental factors currently
causing bottlenecks to growth.
Contributed by Eric Ng, CEIC Analyst
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