FINANCIAL SCENE
Global crisis: are recovery signs real?
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The signals are tentative and the muted optimism is more due to a change in sentiment rather than hard evidence
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The worst might be over for the Indian and global economies. However, a full-fledged recovery is far off and one has to look at much more solid evidence than rising stock prices.
In India as well as in many other countries there is a growing view that the global economic crisis is abating. The signals are tentative and the muted optimism is more due to a change in sentiment rather than hard evidence. For instance, data watchers in many countries see a reduction in the pace of slowdown. That is not the same as discerning positive signs of recovery.
However, the sense of hopelessness that had gripped policy makers, analysts and everyone else is giving way to a belief that the worst of the crisis is over. According to the popular view, the global economy has bottomed out though it is still far from presenting a picture of health.
Heartening cues
Hence statements from politicians and others as well as official data which in other times would be seen to be pessimistic or at best neutral are now viewed as something to cheer about. Last week the U.S. authorities allowed ten banks to return part of the money they had received from the government to shore up their financial position at the height of the crisis. Even though President Obama admitted that the crisis was far from over, the news of banks returning the money ahead of schedule was received positively by the markets. The fact that the banks had received large capital infusion in the face of an extraordinary crisis to save themselves and the banking system from collapse was forgotten. The conditions that prompted such extraordinary action on the part of the U.S. authorities have by no means gone away.
U.S. Treasury Secretary Timothy F. Geithner was probably alluding to the above development when he said last week that “the force of the global storm is receding a bit”. The role the U.S. government was committed to play to save the banks will probably get reduced. He also identified improving signs in the U.S. economy and better outlook internationally. The good news was not confined to the U.S. alone. According to reports, prices in China fell less sharply in May than in April giving rise to expectations that the $686-billion stimulus package of the Chinese government was beginning to check deflationary forces. And latest GDP data from Brazil portend an upswing in its economy.
Bad news ignored
Admittedly there is no shortage of bad news from around the world. But, as pointed above, they are viewed more positively now. Maybe a much better sentiment discounts them. China, heavily dependent on exports, witnessed a slump in trade during May.
That piece of news has neither depressed the stock markets nor seriously discounted the growing belief that its economy was mending.
Policy makers have played a significant role in conditioning expectations. Almost two months ago — during the third week of April — the U.S. President saw “glimmers of hope” while his chief economic adviser Lawrence Summers said that the sense of freefall in the domestic economy would come to an end in a few months. To a great extent the extraordinary measures undertaken by governments around the world — huge stimulus packages and drastic reduction in central bank lending rates (in several advanced economies benchmark interest rates are down near zero) have certainly helped. Politicians look that much more credible when so much of money is committed to rescuing banks and when central banks infuse massive amounts of liquidity unmindful of potential inflationary pressures.
The return of the UPA government, substantially strengthened after the elections, boosted Indian stock markets which no other development could possibly have done.
Recovery in India?
Significantly the indices, having moved to a higher trajectory, remain there. Stock market performance in many other countries too reflects better sentiment. Indian stocks are up nearly 80 per cent over their recent lows. It is true that too much liquidity both from India and abroad is driving the stock prices. However, corporate results indicate a gradual recovery. The southwest monsoon has arrived on time.
With optimism in the air, even lacklustre macro economic data appear rosy. The GDP figures for 2008-09 were released recently. The economy grew by 6.7 per cent on the back of a better than expected 5.8 per cent growth in the last quarter (January-March). However, the economy had grown at a heady 8.9 per cent annually during 2003-08. Even in the first half of 2008-09 the rate of growth was 7.8 per cent.
A 6.7 per cent growth rate looks good because most forecasters, including the IMF and the World Bank, had estimated much less. Just as significantly, India and China along with a few other developing countries have posted positive growth rates. According to the IMF, the global economy as a whole is expected to contract in 2009.
Yet the fact remains that the 6.7 per cent growth rate is the lowest in six years. Also, there are doubts as to whether even this rate can be achieved in 2009-10.
Finally, the impressive rebound in stock prices though welcome need not necessarily presage an economic recovery. In fact, the current bout of exuberance in stock prices is not justified either in terms of economic fundamentals or corporate performance. For those tracking India’s economic performance the stock markets have been a poor guide.
C. R. L. NARASIMHAN
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