At the start of the New Year, global economic sentiment appears to be more upbeat than at any time after the financial crisis of 2008. Even taking note of the pitfalls of a hasty generalisation, it is possible to discern a mood of optimism among policymakers and financial markets around the world. Policymakers in the advanced economies of the U.S., the European Union and Japan — though these countries are in varying stages of recovery — have special reasons for cheer. In the early days after the crisis, they lagged behind the developing economies led by China, India and others, in what the Ineternational Monetary Fund called a multi-speed global recovery. The roles are now reversed, with the developed countries providing the momentum. Leading the pack is the U.S., which is once again driving global economic growth. In a recent major policy speech — possibly the last before he hands over the reins of the Federal Reserve at the end of this month — outgoing Chairman Ben Bernanke examined recent U.S. economic performance from the perspective of global economic growth and found enough reasons to be “cautiously optimistic” about both the developed and emerging market economies. In the last reporting quarter, U.S. economic growth has been higher than expected. Improved economic prospects have induced the Fed to reduce, or taper, the scale of asset purchases it has used to prop up the U.S. economy.
That decision has had varied meanings for the rest of the world. India and certain other countries feared an imminent withdrawal of capital flows which have helped bridge the deficit in its current account. However, they have come to realise that the decision to gradually reverse its ultra-soft monetary stance has been based on an improving domestic economy, and what is good for the U.S. will be good for other economies as well. For instance, more spending by American firms and households will in turn buoy demand for goods and services from across the world. That development has already benefited India, whose exports have picked up smartly since May. To be sure, the U.S. still has its share of problems. Unemployment remains high. But the risks to the world’s largest economy emanating from other areas such as a housing market slump, fiscal dysfunction and the eurozone crisis have clearly abated. One potential area of concern, however, has been the unbridled growth of its financial sector and the failure of regulators to put in place checks and balances. In India the stock markets are running ahead of the real economy, which after a dismal run might have bottomed out and can now only move up.