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Updated: January 28, 2010 03:32 IST

Uneven recovery

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POSITIVE AND CAUTIOUS: International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn said in Tokyo on Monday China and other developing Asian economies are leading a global recovery that is faster and stronger than expected, but warned that money rushing into emerging markets could lead to asset bubbles. Photo:AP
POSITIVE AND CAUTIOUS: International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn said in Tokyo on Monday China and other developing Asian economies are leading a global recovery that is faster and stronger than expected, but warned that money rushing into emerging markets could lead to asset bubbles. Photo:AP

In the most recent update of its World Economic Outlook, the IMF is distinctly more upbeat on the prospects of the global economy than at any time during the past two crisis-ridden years. Economic recovery across the globe is faster than previously estimated. From a negative growth in 2009, the world economy is projected to grow by 3.9 per cent this year and by 4.3 per cent in 2011. The IMF has revised upwards almost all its forecasts made in October 2009, quite substantially in many cases. For instance, in October it had projected the world economy to grow by just 3.1 per cent. In keeping with the observation that has become fairly routine in reports of world bodies including the IMF and the World Bank, China and India are in the forefront of the recovery, with a projected growth rate of 10 per cent and 7.7 per cent respectively in 2010 and 9.7 per cent and 7.8 per cent in 2011.

In contrast, the advanced economies will grow by just 2.1 per cent this year. This certainly will be a vast improvement over 2009, which saw a contraction. But it is not good enough to warrant a roll-back of the strong policy-backed stimulus measures. On the positive side, consumption has been unexpectedly strong, especially in the United States. An appetite for risk is re-emerging and equity markets have rebounded in many countries. In the industrial countries, inflation is not an immediate threat and investor confidence is picking up. But high unemployment rates, rising public debt and, in some countries, weak household balance sheets pose major challenges to recovery. The recovery has been helped by the corrective steps the central banks and governments have taken. But, sooner than later, private demand will have to take over. A withdrawal of these measures in the immediate future carries the danger of pushing these countries back into a recession. Given the fragile nature of recovery, fiscal policies need to be supportive of economic activity in the near term and the fiscal stimulus planned for 2010 should be implemented. However, in the face of mounting fiscal deficits that may not be sustainable very much longer, many countries are already planning appropriate exit strategies. Given the varying pace of recovery, the retreat has to be timed and calibrated according to the situation obtaining in each country.

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Unless the benefit of economic recovery reaches the common man, all the talk of recovery will be meaningless. The last year's statistical figures were showing that inflation was coming down as never before, but prices were speedier than rockets. We were told that prices were rising internationally also. But the systems there are suitably developed to minimise the inflationary effects.Do we have such mechanism?

Posted on: Jan 29, 2010 at 13:42 IST

There is no doubt about the stupendous recovery in almost all equity markets. But this has been fuelled, primarily by the US, UK and Europe providing cheap money at close to 0% interest rates. This entire global recovery has been due to every country providing stimulus to all sorts of industries and thereby increasing their public debt to GDP ratio. When the liquidity is withdrawn by the developed economies, there could be some unwinding in emerging Markets. Unemployment in the developed economies is very high and doesn't planned and phased manner otherwise the risk of countries defaulting is going to increase. The currency carry trade should be monitored and controlled in an emerging market like India otherwise Indian economy could be significantly affected. Regarding inflation in India, the government should look at supply side problems as well as looking at monetary solutions. There is going to be no widespread euphoria until employment rate picks up and people spend real money and not live on excessive unsecured debts.

from:  Ezhil Suresh
Posted on: Jan 28, 2010 at 19:27 IST

That IMF is sounding a reassuring picture gives a lot to be happy about.
But, as the article says, it remains to be seen how market forces will react once artificial pumping in of liquidity is stopped. People all over the world hope that sufficient demand will be generated and that we will slowly get back to more sunny days.

from:  Sreeraj Menon
Posted on: Jan 28, 2010 at 13:15 IST

The economy of a country grows when the policies of its government are such that the domestic demand and production capacity match it grow and do it in tandem.If these policies are also so designed as to promote exports, the economy gathers further momentum. But the problem is that positive feedback from the growing economy, urges the government to further accelerate economic growth by reckless pumping in of money into the system through monetary and fiscal measures. Easy availability of cheap money to consumers and producers of goods and services creates bubbles in at least in some sectors of the economy. When production outstrips demand, primarily because of the creation of excess capacity using imprudent investments or due to consumers getting deeply into debt which they cannot service, the bubbles burst, but not before the highly leveraged growth has pushed prices through the roof. This has happened in India and elsewhere. By trying to cure the problem by throwing more money into the economy through monetary and fiscal measures, inflation at least in our country has become a major problem for the masses. A re-thinking on our fiscal and monetary policies is the need of the hour.

from:  K.Vijayakumar
Posted on: Jan 28, 2010 at 12:43 IST
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