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Business News/ Opinion / Will currency depreciations improve global growth?
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Will currency depreciations improve global growth?

Currency weakening is typically a zero sum game and, at a global level, the effects of policy-induced depreciations are still elusive

If things are coming full circle for the US economy with the dollar’s strength, it wouldn’t be surprising for world output to be pulled down in turn. Photo: MintPremium
If things are coming full circle for the US economy with the dollar’s strength, it wouldn’t be surprising for world output to be pulled down in turn. Photo: Mint

Globally, most central banks are engaged in weakening their currencies. If not intentionally, then as unintended by-product of unconventional or quantitative monetary easing as RBI governor Raghuram Rajan candidly pointed out last year vis-a-vis advanced countries’ policies.

A passing-the-parcel sequence has unfolded in the latter group. The US was the first off the block, beginning its retreat last year. Then Japan launched an aggressive bid to devalue the yen as part of its plan to revive the economy at end-2012. The euro zone recently embarked on the same journey. Emerging market currencies, which earlier faced appreciating currencies, are now bearing a mixed onslaught—rising dollar, rapidly falling yen and euro and variously the effects of falling commodity prices, lower growth, capital inflows and so on.

The net effects of exchange rate readjustments on global growth this year are still unknown. However, if the US economic recovery is a gauge, then is it becoming apparent that currency depreciation isn’t a lasting cure. The first to reap gains off a weaker dollar, economy recovered to grow at 2.2% and 2.4% in the last two years. In 2015, this pace is projected to accelerate a robust 3.6% by the IMF. Yet, the dollar’s rise—from a waning monetary stimulus and weakening currencies elsewhere- is worrying the US central bank. Its chief Janet Yellen importantly flagged the dollar’s strength might be negatively affecting net exports at its meeting last week. While it marginally revised down its current year growth forecast, the Fed’s anxiety suggests the drag from a stronger currency is already biting.

Or that currency depreciation is failing to deliver sustainable growth? In similar replay, an incredibly weakened yen is helping boost Japanese output via foreign demand. And the euro’s sharp decline has lifted euro area exports in recent months with concomitant improvements to its growth prospects. The OECD recently revised up its growth forecasts for this year.

Consider these effects quite temporary though. In the US case, for example, there is optimism that low energy prices will support consumer spending as will a strengthening labour market. But productivity gains have been dismally low; so, the removal of a weak-currency support is raising unusual disquiet. Doubts are surfacing over the sustainability of US economic health. Most estimates of its first-quarter growth reflect a sharp slowdown, although full-year predictions still hold.

For the world as whole, the effects of policy-induced depreciations—the most remarkable tool to revive growth in recent years—are still elusive. These will become visible only as the year unfolds. But do emerging concerns about the sustenance of US recovery signal repetition of a pattern? From 2011, the year begins with upbeat forecasts for global growth; this is followed by successive downward revisions through the year. Revisions to initial projections have ranged from 40-100 basis points (bps) in the last four years by the IMF, for example. Will 2015 be any different? According to the IMF’s January 2015 estimates, world output will lift up to 3.5% this year and 3.7% in 2016 from 3.3% in each of last two years.

If things are coming full circle for the US economy with the dollar’s strength, it wouldn’t be surprising for world output to be pulled down in turn. Not only is someone’s gain another’s loss in a currency weakening game—a zero-sum game—but when the time comes to shift gears, the baton needs to be passed on to another driver for the recovery to sustain.

Renu Kohli is a New Delhi based macroeconomist.

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Published: 31 Mar 2015, 03:34 PM IST
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