The world in 2012 according to China and India
December 15, 2011

A month away from the year of the dragon, known for its temperament and wild swings, Inchin Closer takes a look at what 2012 will have in store for the global economy from a China-India perspective. While their sweet and sour relations continue to tantalize the world, we look at global growth, inflation, the next big dip, and whether China and/or India will face any major political upheavals or social unrest.

Asia Will Continue to Outpace the Rest of the World. While Asia will not be immune to a recession in the Eurozone, growth in the region will remain resilient and will continue to be the strongest in the world (around 5.5 percent), for a number of reasons. China and India will continue to rule the roost while other emerging economies such as Vietnam and Indonesia will help prop up regional growth. Chinese and Indian growth can be expected to hold up at around 8 percent, provided China’s housing downturn and India’s political logjam does not evolve into something much worse. Last but not least, easing inflation will give all Asian governments more leeway to stimulate, if necessary.

Monetary Policy Will Either Be on Hold or Ease Further. Easing inflationary pressures and increasing anxiety about the growth outlook have changed the priorities of central banks worldwide. Central bank actions can be broadly categorized in three ways: 1) those with policy rates already near zero (e.g., the Federal Reserve, Bank of England, and Bank of Japan) will stay there indefinitely (or at least for a couple more years), in some cases with further quantitative easing in 2012; 2) some central banks that had been raising interest rates have now stopped (e.g., the Reserve Bank of India); and 3) some that had been tightening are now easing (e.g., the European Central Bank and the People’s Bank of China).

Inflation Will Diminish Almost Everywhere. With world growth softening and commodity prices off their peaks, inflation in every region of the world will decline in 2012. The drop in inflation is likely to be the most pronounced in the developed world, because of vast amounts of excess capacity in both labor and product markets. In the emerging world, the recent declines in food prices are having the biggest impact. Without a spike in oil or food prices—triggered by a geopolitical events or bad weather—the inflation picture in 2012 will be quite benign.

Domestic production and consumption given importance.  India and China will give their domestic industries greater importance, channel additional funds, work on improving the quality of labour and try to remove legal and political obstacles from hampering growth. India especially has over the past few months seen fragmentation within its political coalitions whose disunity is proving to be fatal for businesses. By spurring domestic production and consumption both economies will be able to uplift their economies regardless of the turmoil brewing in the West. Economies of scale will rebalance trade and monetary and fiscal loosening will further spur the markets.

Social conflict will rise. As income disparities increase, and the whimsical year of the dragon swooshes in, social unrests are expected to grow. The rise of the proletariat in China and India will herald a new generation, a new way of thinking, buying, selling and will re-write the way business and politics is run. Both nations face national elections soon – China in 2013 and India in 2014, the current political parties are finding it increasingly hard to tenaciously hold on and are slowly loosing their grip to people power. Buoyed by the spreading influence over the internet, people are taking politics into their own hands and expressing their displeasure. If something isn’t done to appease the people, it will be the greatest downfall of 2012.

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