As growth slows in India, news from abroad adds to the sense of gloom. Just released GDP figures suggest that growth has decelerated further in the US, clocking 1.5 per cent on an annualised basis in the second quarter of 2012. US real GDP had risen at an annual rate of 1.9 per cent in the first quarter of 2012 relative to the previous quarter (that is, the fourth quarter of 2011). Measured on the same basis, real GDP had increased 3.0 per cent in the fourth quarter. So the decline seems persistent and significant. And it occurs in a country where intervention to save the banks and spending to reverse the recession seemed to have begun to work. Now that recovery, dated to mid-2009, is showing signs of losing steam.
Meanwhile, matters in Europe are getting worse than they were expected to be. With Eurozone governments unable to agree on the scope and scale of spending to aid recovery, there is reason to believe that the crisis would not just intensify in countries like Greece and Spain, but would spread to countries like Italy and even France. The quarter-on-quarter annual growth rate in the group of 27 European Union countries fell to near zero in the first quarter of 2012, from 2.44 a year earlier. This is because countries like Germany that were doing well and pulling up the average are now being overcome by the crisis.
To top it all, countries like China and India, which were expected to serve as buffers against a slide into recession, are also experiencing a slow down in growth. China’s GDP grew by an otherwise credible but significantly lower 7.6 per cent in the second quarter of 2012. This was the sixth consecutive quarter in which the rate has fallen. In 2011 level GDP is estimated to have risen by 9.2 per cent. Overall, the first half growth rate in 2012 is the lowest in three years. The only cause for comfort is that various arms of the state are promising to address the problem. Besides cutting interest rates aggressively, a recent meeting of the Politburo of the Chinese Communist Party endorsed a decision to enhance public spending and expand lending backed by an easy money policy. But fears that this may aggravate the speculative boom in housing markets may slow the process.
In India too, GDP growth in 2011-12 was down to 6.5 per cent, as compared with 8.4 per cent in 2010-11 and 8 per cent in 2009-10. The Reserve Bank of India in its latest quarterly review estimates growth to remain there in 2012-13. That is, the country’s quick recovery from the 2008-09 downturn is being reversed. But the RBI says it cannot reduce interest rates to address the problem since inflation is still a problem. Nor is the government in a position to expand spending since it is committed to reducing its fiscal deficit, without additional taxation. The likelihood is that the slowdown would persist, adding to the woes of a slowing world economy.
In short, nearly five years since the onset of the Great Recession, the crisis is not merely still with us, but shows signs of intensifying. The consequence is a jobs crisis of unpredicted proportions in the OECD countries. Having risen sharply after the onset of the crisis in the last quarter of 2007, the unemployment rate refuses to return to its pre-crisis levels and is still rising in the EU excluding Germany. In the US, increases in non-farm jobs are falling, and the unemployment rate stays stubbornly above 8 per cent, despite the fact that many have pulled out of the workforce convinced that job search is futile. In the Euro area, the unemployment rate touched an all-time peak of 11.1% in May.
But the bad news does not end here. As the world confronts a second recession inflation is proving a new threat. Among many factors, two seem to be particularly responsible for this. First, world oil prices that had initially fallen sharply from their pre-crisis peaks have risen significantly and in real 2010 dollars are at levels close to the highest peak they have touched since the oil shocks. The factor that seems to have provided a fillip to the price rise was the standoff between Iran and the West, ostensibly over the former’s nuclear programme. But this did not lead to any shortfall in oil availability. The recession has shrunk demand. The threat of a European embargo on imports from Iran is yet to be implemented. And, as in the past, Saudi Arabia has helped cool the oil market with its spare capacity and its willingness to ramp up production to cover any unmet demand. If despite these factors that keep the supply-demand balance in control, prices have risen, it is because of the speculation engaged in by global finance by exploiting the prevailing political uncertainty. This makes the tendency more long- term in nature.
Second, the world is faced with the third food price spike in the last five years. In recent times food prices have tended to follow increases in oil prices, not least because of the diversion of land to crops used to produce bio-fuels. But that tendency is being aggravated because of the effects that extreme bad weather in different parts of the world is having on production of crops such as corn and soybean. In particular the worst drought in half a century in parts of the US has generated expectations of a supply short fall. In mid July the US Department of Agriculture assessed that only 31 per cent of the corn crop and 34 per cent of the soybean crop was in “good to excellent” shape. With the US being a major supplier to world markets, this news has sent corn and soybean prices soaring. As of now, global wheat prices have not risen as much. But dry weather is expected to adversely affect the wheat crop in Russia, Ukraine and Kazakhstan and push wheat prices up as well.
These trends in oil and food markets imply that the world is set for a bout of inflation precisely when growth is slowing. This would increase the reticence of governments and central banks to hike spending or ease money supply—actions needed to counter the decline into a second recession. This is bad news indeed for a world tired of waiting for a recovery.