A conference on Global Financial and Eco-nomic Crisis and Growth Rebalancing held recently in

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Tokyo, generated a rich discussion. The three questions that expectedly dominated the proceedings were: first, whether the so-called ‘green shoots of spring’ herald the beginning of a full-fledged global economic recovery; second, if the recovery in advanced economies and the US will be V, U or L shaped one; and third, if China will succeed in switching its growth drivers from external demand to domestic consumption. On the India story, which I presented, the general agreement was that while the Indian economy was suffering a hiccup, induced by a combination of policy-tightening and external shock, its medium-term growth potential at 8-9 per cent remains in place.

The IMF effectively pre-empted any speculation on the first issue by releasing its latest forecast on April 22, the first afternoon of the Asian Development Bank Institute conference. The Fund revised its forecast downwards, for the fourth time since July 2008. These estimates show that the world economy will contract by 1.3 per cent in 2009. Advanced economies are expected to contract by a record (-)3.8 per cent and Asia’s newly industrialising economies by 5.6 per cent.

Among the advanced econ-omies, the worst sufferers are likely to be Japan and Germany, likely to see output shrink by 6.2 per cent and 5.5 per cent in 2009. The UK and the euro area will see GDP decline by 4.1 per cent and 4.2 per cent and the US by 2.8 per cent. The disturbing part of the forecast is that even in 2010, world output and advanced econo-mies are not expected to achieve positive growth.

Based on these somewhat chilling numbers, it can be said with some degree of confidence that the spring sprigs of recovery are a mere transient relief. We should cherish these, because the future perhaps has more disappointment and pain in store before recovery begins.

The IMF estimates that despite the massive fiscal stimulus, the US economy will decline by 2.8 per cent in 2009 and stagnate in 2010. Quite clearly, with the collapse of the financial sector and a loss of competitiveness in automobiles, consumer durables and electronics, the US economy is searching for new growth drivers.

On the demand side, households that have suffered serious wealth loss and are faced with uncertain future employment and income pro-spects, are unlikely to raise consumption in the next couple of years. This brings to mind the prospects of US following the experience of Japan’s lost decade and a L shaped recovery. So let us hope that the Obama administration’s initiatives will yield early results. But it is difficult to see these take hold in less than two years. The best we can hope for is that Obama cans into his next campaign in 2011 with recovery having taken roots. Thus, we can at best expect a U shaped recovery.

This implies that the world has to look for alternate sources of demand for at least the next two-three years. The recent strengthening of the dollar, of course, does not help. Let us hope that this trend will be reversed in the second half of this year and the US will benefit from some additional external demand.

With the euro area actually suffering a worse decline and likely to continue contracting in 2010, the only other major source of global demand is the Asia-Pacific region, where the growth impetus is largely dependent on China and India. IMF’s forecast for the Indian economy for 2009 is 4.5 per cent. Icrier has estimated Indian GDP to grow between 4.8-5.5 per cent in 2009-10, depending on the effectiveness of fiscal and monetary policy response. These estimates make the latest pronouncements of 6 per cent made by RBI and the planning commission to be on the optimistic side.

But the key question is whether the Chinese, with their $580 billion stimulus package can successfully make the switch from external demand to domestic sources of growth. The paper at the conference by Bin Zhang and Yongding Yu argued that recent data pointed to the Chinese economy achieving a V shaped recovery, with credit offtake, cement and steel production and manufacturing beginning to revive in March after the massive inventory correction of previous months. This is taken as evidence of the stimulus beginning to work and its multiplier estimated at 0.84 pushing up economic activity and employment in 2009 to achieve 6.5-7 per cent growth. But the two Chinese authors also correctly point to the acute need for significant structural reforms focused on raising efficiency and productivity levels in non-tradable sectors for this recovery to be sustained and the switch from external to domestic demand being made successfully.

In this respect, both Indian and Chinese economies are similar, in that future growth is dependent on successfully implementing the next generation of structural reforms. The world will watch with heightened anticipation the Chinese attempts at turning around the economic juggernaut and shoring up global demand. The Chinese miracle is best summed up by observing that in 1978, Deng had said that China could not do without global capitalism, three decades later, it is clear that global capitalism cannot do without China!

The writer is director and chief executive, Icrier