THE OECD HAS HIKED ITS THIRD QUARTER FORECASTS by 1.8 percentage points (ppt) since June, signalling a clear revival in advanced economies. But the recovery is heavily dependent upon government spending — in the US, this accounted for 45% of the positive growth impulse in Q2 while exports contributed 55%. The banking crisis hasn’t abated and the number of problem banks in the US has risen to a 15-year high. Though corporate profits are up in the US, bank lending is below pre-crisis levels and risk-premia on BBB-rated firms are also above pre-crisis levels.
A sharp hike in US savings means a consumption-to-GDP fall of 3 ppt, so other countries (like China) need to increase their current account deficits significantly to take up the slack — all of which point to a weak global recovery. India’s recovery is a lot sharper and seems more sustainable. Manufacturing has rebounded sharply, construction is recovering after two terrible quarters and capital formation remains a healthy 31.6 per cent of GDP — bank credit continues to rise in tandem with industrial growth and raising funds in the capital market once again seems possible. The role of government expenditure in stimulating growth appears to be reducing somewhat.