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Manas Chakravarty: Some clouds, but a rock-solid base

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Manas Chakravarty New Delhi
Last Updated : Jun 14 2013 | 4:11 PM IST
 
Much of the discussion on the global boom in equities has focused on liquidity flows to emerging markets. The argument has been made over and over again that very low real interest rates in the US have led to a tsunami of liquidity of unprecedented proportions flowing out across the globe, raising asset prices.
 
But while that portrayal of the rally may be correct in many respects, is it possible that it is too facile? Could it be that the liquidity, while undoubtedly present, is merely the froth on the surface of a more underlying change in the fundamentals?
 
Consider some of the facts. It's customary, these days, to start with China. The August issue of the China Quarterly Update tells us that China's GDP grew at 9.5 per cent in the first half of 2005.
 
Chinese exports were up 29 per cent in July, its fixed asset investment rose at a year-on-year pace of 27.7 per cent, and industrial production rose 16.1 per cent in that month.
 
The data show few signs of the long-predicted slowdown in the Chinese economy. That's also seen from the commodities index, with the Goldman Sachs commodities index showing gains of 41.8 per cent in 2005.
 
In India too, with industrial production in the double digits, with GDP growth expected to be 7 per cent this fiscal, and very robust corporate earnings, it can be argued that there is a strong fundamental basis to the market rally. The Asian Development Bank recently revised the 2006 growth rates for both the Indian and Chinese economies upwards.
 
But while the India and China growth stories are well known, the point is that many economies are doing exceptionally well currently. Consider, for example, the Japanese economy. Bank lending there has recently risen for the first time in seven years.
 
Office vacancies in Tokyo fell to a three-year low in August while Japanese housing starts rose in July to their highest growth in eight years. Morgan Stanley has raised its forecast for Japan's GDP growth from 1.6 per cent to 2.5 per cent for the year to March 31, 2006.
 
In the rest of Asia, Taiwan's exports grew in August at the fastest pace in four months, and its economic growth rebounded from a two-year low in the past quarter, while its unemployment rate fell to a four-year low in July.
 
In South Korea, August exports rose at the fastest pace in nine months. Thailand's tax revenues have risen 20 per cent last month, while Singapore's exports expanded in July at the fastest pace in the last two-and-a-half years.
 
In Australia, the unemployment rate is at a 29-year low, GDP growth in the quarter ended June was the highest since the fourth quarter of 2003, and business investment in the second quarter rose at twice the pace expected by economists.
 
Even sluggish Europe is waking up. German manufacturing orders in July were the highest this year, and the domestic economy expanded in the second quarter for the first time in nine months.
 
Also in the second quarter, Portugal's economy grew at its fastest pace in five years, while for the Czech economy, growth was the fastest in nine years.
 
In July, France's unemployment rate hit a two-year low, while the pace of borrowing by Norwegian households and businesses was the highest in more than four years. Swedish consumer optimism surged to a four-and-a-half-year high in August. In the UK, a measure of construction activity rose to its highest in 16 months in August.
 
In North America, Canada's industrial companies used more of their production capacity than at any time in more than four years in the second quarter.
 
In Latin America, Brazil's current account surplus rose to a record in July, thanks to booming exports "" the surplus was the highest in any month since 1980. Imports too rose at the fastest pace in 17 months. Venezuela's GDP growth was 11.1 per cent in the June quarter.
 
And in the US, the Beige Book shows a strong economy pre-Katrina, with widespread growth in retail sales, services, finance, construction, manufacturing, mining, energy and tourism.
 
Simply put, what this whirlwind, and admittedly selective, survey of the global economy shows is that while the boom in equities, and indeed in asset prices may be a global phenomenon, it is buttressed by a global pick-up in economic activity.
 
Of course, there are always clouds on the horizon. Chinese industrial firms' profits, for instance, rose 20.6 per cent in the first seven months, but that's much lower than 39.7 per cent growth in the same period last year. Steel and iron ore prices have fallen steeply in China.
 
And there are many economies that are not doing well. But the bulk of the data seem to indicate that there's enough momentum in the global economy to provide a solid fundamental basis to the boom in asset prices.

 
 

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Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper

First Published: Sep 12 2005 | 12:00 AM IST

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