Spring is in the air. Green shoots of economic recovery have been spotted in both the West and Asia. After a price slump of 30 per cent from peak levels, housing sales in the US rose in February for the first time in many months. US auto sales rose 8 per cent in March over February levels. The outlook for new orders of factory purchasing managers improved. US stock prices jumped 20 per cent from their early March lows. China’s central bank announced that that leading indicators were pointing to a growth recovery. At the global level, last week’s London G-20 summit was deemed a moderate success, with over a trillion dollars committed for international financing support (mostly via the IMF) and the right sentiments being reiterated on halting protectionism, sustaining fiscal stimuli, strengthening surveillance and regulation of cross-border financial transactions and discouraging tax havens. India was not to be left behind. Auto sales perked up in March, as did the demand for steel, cement and bank credit. In recent weeks the Sensex has climbed back above 10,000. Some commentators also seem to have been infected by the spring bug. This newspaper editorialised about “The end of fear” (April 4) and sniffed “A whiff of stability” (April 8) in the economic condition. Fellow columnist Surjit Bhalla went much further (BS, April 4) in forecasting a V-shaped global recovery beginning in 2009 and robust Indian economic growth “close to 7 or 8 per cent” in fiscal 2009/10.
Are we really in sight of a strong global recovery? And will India grow so strongly this fiscal year? On the first question, the OECD (the organisation of 30 “advanced” countries) was unequivocally gloomy in its “Interim Economic Outlook” published last week. It projects a large 4.3 per cent decline in the GDP of member countries in 2009, a 2.7 per cent contraction in global output (much steeper than the IMF’s forecast), a massive increase in unemployment in member countries and an astounding 13 per cent fall in international trade. It expects the global recession to worsen through most of this year before a recovery begins in 2010, at different times for different member countries. For the full year 2010, the Outlook projects stagnation in economic activity for OECD countries. The US economy is expected to contract by 4 per cent in 2009 and stagnate in 2010, although a recovery is predicted to kick in during the first half of 2010. A similar trajectory is foreseen for the Euro area. For Japan, the Outlook predicts a sharp 6.6 per cent fall in GDP in 2009, followed by a further half per cent decline in 2010. Incidentally, the Outlook expects India’s growth in 2009 to be 4.3 per cent and China’s 6.3 per cent.
Perhaps equally worrying is the likely nature and durability of the recovery in major economies. As the Outlook points out and as Martin Wolf has elaborated (Financial Times, April 1), the much-hyped fiscal stimuli are coming mainly from the advanced countries with large current account deficits in their balance of payments. The surplus countries (notably China, Germany and Japan) are yet to fulfil adequately their responsibility for higher fiscal stimulus and greater private spending. The much larger fiscal deficits in (BOP) deficit countries are compensating for their sharp drops in private spending (consumption and investment). But in the (BOP) surplus countries private sector surpluses (savings) remain high, with the modest reductions in current account deficits reflecting modest increases in fiscal deficits. The net result is painfully slow adjustment in the underlying global imbalance problem. As Wolf puts it, “This is not a path towards durable exit from the crisis. It is a path on which the fiscal deficits needed to offset persistent current account deficits, and collapsing private spending in external deficit countries, continue indefinitely…The world economy cannot be safely balanced by encouraging a relatively small number of countries to spend themselves into bankruptcy.”
The second big impediment to a strong global recovery is the continuing weakness of the banking system in the US and other Western nations. Despite massive capital injections in the banks and trillions of dollars of quantitative easing by the Fed and other central banks, bank lending remains anemic because balance sheets are still groaning under the weight of legacy toxic assets. Even if the Geithner plan is successful in neutralising much of this burden (possibly at a high fiscal cost), bank balance sheets will be increasingly stressed by rising non-performing assets as this deep recession takes its toll of a growing number of businesses. There is a high probability that banks in the US and some European countries will require further large injections of capital from government. The key problem here is whether the US Congress (and other relevant legislatures) would approve further commitment of large-scale public funds to hugely unpopular banks. If not, banking weakness could persist for years.
Against this backdrop it is hard to see how global recovery can be V-shaped. It is far more likely to resemble an L or a U. Indeed the most likely prospect may be of a “reverse J” (or a J in a mirror): that is when global growth drops sharply, recovers slowly and never quite captures its earlier momentum.
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In India, there are signs of modest recovery, or at least stability in some sectors. But the overall index of industrial production (IIP) was still 0.5 per cent lower in January 2009 as compared to a year ago. Since then, we know that merchandise exports fell by over 20 per cent in February y-o-y, and quick estimates for March indicate a 30 per cent drop. None of this augurs well for forthcoming data on the IIP for these months. Outside of telecom and Pay Commission fuelled government services, it is hard to find solid information of growth or recovery in major service sub-sectors. The anecdotal evidence from real estate, retail, IT, finance, travel and tourism is still mostly negative. So, the obvious question is where is Surjit Bhalla’s hope of 7 to 8 per cent growth in 2009/10 going to come from? It is much easier to accept the 4 to 5 per cent growth projections that are being peddled by international organisations and investment banks.
Green shoots of spring are all very appealing but will they really spread and grow into a solid recovery? Or is hope of 7 per cent-plus growth in 2009/10 a product of a (spring-) fevered imagination? For now, I prefer to stick with my 4 to 6 per cent range for likely growth this fiscal year.
The author is Honorary Professor at ICRIER and former Chief Economic Adviser to the Government of India