'Green shoots' has been a favorite phrase amongst economists in recent months, as the slowing momentum of global economic decline raises the hopes that recovery from the recession may be near . After the collapse of Lehman Brothers in September 2008, the global financial system nearly melted down and the world economy went into free fall. Infact, the rate of economic contraction in the fourth quarter of 2008 and the first quarter of 2009 reached near-depression levels.
Come mid-2009 many pundits are suggesting that the recent data from the manufacturing, housing market, labor markets suggest that the “green shoots” of an economic recovery are blossoming. These tentative green shoots that we hear so much about these days may well be overrun by yellow weeds even in the medium term, heralding a weak global recovery over the next two years. First, employment is still falling sharply in the US and other economies. Indeed, in advanced economies, the unemployment rate will be above 10% by 2010. This will be bad news for consumption and the size of bank losses.
Come mid-2009 many pundits are suggesting that the recent data from the manufacturing, housing market, labor markets suggest that the “green shoots” of an economic recovery are blossoming. These tentative green shoots that we hear so much about these days may well be overrun by yellow weeds even in the medium term, heralding a weak global recovery over the next two years. First, employment is still falling sharply in the US and other economies. Indeed, in advanced economies, the unemployment rate will be above 10% by 2010. This will be bad news for consumption and the size of bank losses.
Second, in countries running current-account deficits, consumers need to cut spending and save much more for many years. Shopped out, savings-less, and debt-burdened consumers have been hit by a wealth shock. Third, weak profitability, owing to high debts and low economic – and thus revenue – growth, and constant deflationary pressure on companies’ margins, will continue to constrain firms’ willingness to produce, hire workers, and invest. Fourth, rising government debt ratios will eventually lead to increases in real interest rates that may crowd out private spending.
Finally there is a risk that the increase in commodity prices might choke off a sustainable recovery if it weighs on industrial production and consumption. The recent increase in commodity prices, has contributed to an increase in the Baltic Dry shipping index. Moreover although trade finance is no longer quite as impaired as at the turn of the year, global trade continues to be quite weak as evidenced from recent data from China, the US and other countries.
In India’s case, benchmark equity index ,BSE sensex has soared 92 per cent from 2009 lows in early March, mainly driven by foreign fund inflows of almost $7 billion. India Inc has already raised Rs 5,000 crore from qualified institutional placements (QIPs) so far in 2009 and announced plans to raise another Rs 24,000 crore. The government today announced that industry output, as measured by the index of industrial production (IIP), grew 7 percent which may indicate that the decline in factory production has been arrested and adds to hopes of economic recovery.
Recently at the CEO round table organized by The Economic Times on the theme: Green Shoots or Yellow Weeds: Is the Recovery for Real? , Wipro chairman Azim Premji was heartened by the return of stability but warned that a runaway fiscal deficit could end up harming the economy. On the positive side , The panelists unanimously felt that India was on a strong wicket and that immense opportunities exist in the Indian market for companies to tap into.
To sum up, green shoots are more visible as of now but there are yellow weeds too. It is the duty of the governments and the central bankers to protect the green shoots and weed out bubbles. If they fail to do so, bubbles would impact the global economies badly.
Submitted by:
Sachin Matpal
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