As the economic data for the fourth quarter of countries get released, the picture becomes steadily grimmer. The numbers for the US, released last week, showed a 3.8 per cent quarter-on-quarter decline, following a decline in the previous quarter. This was actually better than the general expectation of a 5 per cent decline, a difference explained by higher than anticipated inventory accumulation. This bodes ill for the next quarter, as companies cut production until inventories are drawn down. Inventory management will also adversely affect exports to the US, which is bad news for Asian economies.
Meanwhile, the Chinese government revealed that the economy had grown at a year-on-year rate of 6.8 per cent during the October-December period, sharply down from the almost 10 per cent pace during the previous three quarters. However, on a quarter-on-quarter basis, this translates into virtually no growth, and some experts have suggested that China may be in a recession, using the criterion of successive quarters of negative quarter-on-quarter growth; the current momentum clearly indicates that the first quarter of 2009 will show more of the same. Japan also had a miserable quarter, with 9 per cent declines in factory output in November and December. In short, the probabilities for 2009 are inexorably shifting towards the negative end of the forecast range.
Given the likely quarterly pattern, are there any rays of hope? The main potential contributor to stemming the decline is the huge turnaround in monetary policy across the world as inflation fears recede. The process began in July and August. Since monetary policy works with a lag, it will be a few months before the change begins to show an impact. However, there are some concerns here as well. First, the US and Japan have brought their policy rates down to zero, and therefore will have to depend on unconventional (and untested) methods to provide further stimuli. Second, the financial system is not in any state to pass on the huge liquidity infusions through higher lending. This shifts the onus on to fiscal policy. While a number of initiatives have been taken by various governments, notably China and the US, many influential commentators have criticised the US package in particular as being too small as well as misdirected, with too much money flowing into the economy too late. All these considerations, while not eliminating the possibility of stability being achieved during 2009, strongly suggest that policymakers around the world would be better off anticipating the worst and hastening whatever actions they can take. A false sense of comfort about the inevitability of the recovery can only serve to make things worse by deterring or delaying responses.
In this context, it is worth pointing out that the view within the Government of India, most recently expressed in the forecast for 2009-10 made by the Prime Minister’s Economic Advisory Council, seems to be at odds with what both international and domestic forecasters are saying. Their expectation that the economy will grow at around 7.5 per cent in the next fiscal year flies in the face of both the negative global momentum and the doubts about the effectiveness of the monetary and fiscal policy responses.