The Recovery Question

Courtesy : Joshua Zumbrun for Forbes

Friday's GDP data shows the economy is on the mend. Can it last?

What's the story with the economy?

Optimists see the current stabilization as a spurt, likely to be followed by years of slow but steady growth. Pessimists see it as a mere pause before continuing to tumble down the stairs. Few see the foundations for a return to the long expansions in the '80s and '90s.


On Friday, new government data on America's gross domestic product showed the economy shrank by 1% in the second quarter, according to the initial estimate from the Bureau of Economic Analysis.

Though still negative, this was the best GDP statistic in a year--compared with shrinking by 2.7% in the third quarter of 2008, 5.4% in the last three months of 2008, and by 6.4% in the first three months of 2009, according to the newly adjusted data.

Although improvement from previous months was widely anticipated, a Bloomberg survey of economists projected the economy would shrink at a 1.5% rate in the second quarter of 2008. (Forecasts were complicated because of a twice-a-decade statistical adjustment that coincided with this release.)

The trends are in place for growth in the third quarter. More confident consumers, a stabilizing housing market, a better outlook for businesses and a big (but temporary) boost from the government help in the short term. Indeed, it may eventually be determined that the recession has already ended (though not everywhere). (See: "Where Unemployment Has Hit Hardest.")
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What's harder to see is how the economy keeps up its strength. "Recessions come to an end, indeed, but the transition phase to the next sustainable bull market and economic expansion following a post-bubble credit collapse is treacherous. If there is anything we have learned from history, that would be it," said David Rosenberg, former economist for Merrill Lynch and now the chief economist for Gluskin Scheff, before Friday's release. "So long as credit continues to contract, any recovery is going to be fraught with deflation pressure and double-dip recession risks along the way."

A look at some major components of the economy show why he's worried:

Consumption: Personal consumption makes up over 70% of the U.S. economy. In the second quarter, consumers regained some of their confidence as fears of a Depression eased, and consumption fell by just 1%. John Canally, economist for LPL Financial, points to the savings rate, now at about 7%, as a positive sign since a hefty chunk will get spent. But still more will be needed to reduce debts and fix family balance sheets. And that could constrain growth.

Meanwhile, borrowing will get more expensive. Though Federal Reserve Chairman Ben Bernanke says he's got inflation in hand and he'll keep interest rates low for the foreseeable future, in time the Fed will have to raise interest rates to stop the money printed during the recession from flooding the economy.

Investment: Investment in equipment, software and building for businesses fell by 9%. In the first quarter it fell by 39%, so the number is not nearly as bad. The huge reduction in investment will reverse simply because businesses have to replace old equipment, but with an uncertain outlook for consumers, many businesses will be reluctant to invest for the long term.

Housing: Investment in housing fell 29%, still an ugly number but not as bad as the 38% in the first quarter. Reports this week from the Census Bureau and the Case-Shiller Home Price Index show signs of stabilization in both prices and sales. But housing activity normally picks up going into the summer only to slow back down during the winter months (who buys a home in December?). Prices could fall again, and many potential sellers have been waiting out the bad market. Their return will keep a cap on prices, and all the homes going up for sale will reduce the incentive for homeowners to build new homes.

Trade: In the second quarter exports fell, but imports fell even more. This means the trade gap again narrowed. Larry Summers, the president's top economic adviser, envisions a future for the U.S. built more on exporting. The trade gap has long reduced the country's GDP (by about 3% now, but by about 5% in 2008, before global trade collapsed), since the U.S. imports more than it exports. If this trend reverses, it could add to growth. Exports have helped lead the country out of the last two recessions, notes Canally of LPL Financial.

But with so many economies around the world damaged, who will buy American exports? Climbing oil prices could also drag on growth.

Government spending: Government spending is 21% of GDP and growing fast. Government spending increased by 5.6% due to an increase in defense purchases and the spending portion of the $787 billion stimulus package kicking into effect. In coming quarters, the $787 billion stimulus package (which got off to a slow start) will further increase the size of the government in the economy and contribute to GDP growth.

But by the end of 2010, the bulk of the stimulus will have been spent. If the government shrinks back down, it will provide less GDP growth. Another stimulus? Perhaps. But can the government really afford to grow any more than it already has in the last six months?

Economy can grow 6.5%: RBI survey

Courtesy : Business Standard /Press Trust of India

The Reserve Bank of India (RBI) today revised its economic growth forecast to 6.5 per cent for this fiscal, saying the situation is better than what was perceived in April though the conditions are not enough to fuel a global recovery.

The RBI Professional Forecasters Survey, sponsored by the central bank, had forecast 5.7 per cent economic expansion in April but the June numbers reflect a pick-up in economic activity.

The forecast is part of the macro-economic report by the RBI, which said signs of revival in the global financial conditions seen in Q1 of FY10 are necessary, but were not sufficient to induce a firm global recovery.

The central bank estimates comes a day ahead of the quarterly review of credit policy.

Visible signs of price pressures pose complex challenges for the conduct of monetary policy, particularly given the dampened domestic demand conditions, the RBI said.

Wholesale price-based inflation was (-)1.2 per cent as on July 11 mainly due to base effect, even as most commodity prices have moved up sharply.

Consumer price inflation remained high in the range of 8.6-11.5 per cent during May-June 2009 on a Y-o-Y basis as compared with 8-9.7 per cent in March, the RBI said, noting that hike in motor fuel prices was fuelling price rise.

Services sector too showed positive signs, with a surge in lead indicators such as railway freight and new mobile connections, besides improvement in tourist arrivals.

However, commercial vehicle production and port cargo movement decelerated in the first two months of this fiscal.

Overall, the corporate performance subdued and there was a substantial deceleration in sales growth in the second half of 2008-09. "Corporate profitability also exhibited negative growth in the last three successive quarters of the year."

The central bank said the existing financial conditions are necessary, but not enough to fuel a global recovery.

On government pegging fiscal deficit at 6.8 per cent in FY10 to boost demand and support a faster recovery, RBI said: "Notwithstanding the necessity of an expansionary fiscal response to the growth slowdown, there is a need to address the challenges for fiscal consolidation with a view to returning to the high growth path at the earliest."

The RBI Professional Forecasters Survey pegged economic growth in FY10 at 6.5 per cent.

RBI said that the growth outlook for 2009-10 needed to be assessed in the context of lead indicators so far, which it named as improved core sector performance, industrial output, demand revival for non-food credit and corporate showing.

However, it warned that there were other factors that could dampen growth outlook such as delayed progress of monsoon, decline in exports and lagged impact of poor manufacturing output of last fiscal.

Indian Economic Growth

About India economic growth

India's economic growth really kicked off in 1990s when India made its markets more accessible. This was done by introducing a number of economic reforms. From that point in time Indian economy has been growing at a steady pace. However, India's economic growth has not been exactly steady. In 1991, Rajiv Gandhi-led Indian government imposed limits on office holders regarding expansion of capacity, brought down corporate taxes, and abolished price controls. This led to an increase in growth of Indian economy.

But there are some disparities across states and sectors. For example, Maharashtra has been in better economic condition than states like Bihar.

In past, India's economic growth has been hampered by a variety of factors. For example in 2002, lesser expenditures in areas like power, telecommunications, construction, real estate and transportation prevented good growth of Indian economy. This led to permission and promotion of foreign investment, which has contributed to a continuous rate of development in last one and a half year.

India GDP growth
In financial year 2007-08, India recorded a growth of 9.1 percent in its gross domestic product. This has enabled India to be counted among two quickest emerging economies of global world. In this regard, it is placed right after China. A number of economists are of opinion that if India can sustain this rate of development they would soon be regarded as a big name in global economic scenario. Goldman Sachs has predicted that by 2020 India's gross domestic product would be four times of what it was in 2007.

Indian economy growth in colonial period

When India was first colonized by British, Indian economy was going through a relatively good period. Production and trade had increased. However, when India ceased being a colonial nation, it's economy had already been massively exploited and lay in tatters. A number of leftist economists had squarely blamed British for decline of Indian economy but their views have been opposed by rightist economists who opine that since a number of sectors in India were at a developmental stage, economy of India was unable to sustain that impressive rate of development.

Govt borrowings won't affect interest rates: FM

Courtesy : Business Standard

Pranab has projected government borrowings of Rs 4.51 lakh crore for the current fiscal

Amidst concerns over possible rise in interest rates due to the huge government borrowing programme, Finance Minister Pranab Mukherjee today reassured that interest rates would not rise in the next few months.

“Last fiscal also the Reserve Bank of India (RBI) was prudent in debt management, and this year also we will ensure that the private sector can avail loans at affordable rates, and do not pay higher interest rate,” said Mukherjee here today after the simultaneous inauguration of 154 State Bank of India (SBI) branches and 2,151 ATMs across the country.

In the 2008-09 Budget, the government had projected a borrowing of about Rs 1 lakh crore, but due to the economic slowdown, the resultant slowdown in the manufacturing sector and low revenue collection, the borrowing was raised to nearly Rs 3 lakh crore, the minister said.

The finance minister said he held a meeting with the board of directors of the RBI yesterday for post-Budget discussions.

The Budget has projected a gross government borrowing of Rs 4.51 lakh crore for the current fiscal, about Rs 89,000 crore more than what was forecast in the Interim Budget.

Bankers have been anticipating rise in interest rates in the next six months, due to the government borrowing and the divergence between the consumer and wholesale price indexes.

“As part of the interest rate cycle, we have seen that in the past few months the interest rates have softened. The situation is now going to turn in the third quarter, when the corporate demand picks up, one should be ready for higher interest rates,” IDBI Bank Chairman and MD Yogesh Agarwal had said recently.

State Bank of India had also echoed a similar view.

The finance minister also said that the government was aware of the divergence between the CPI and the WPI, and the government has set up a committee under the Central Statistical Organisation for overseeing the convergence between the two.

SBI plans to open 1,000 more branches and 10,000 ATMs in 2009-10, majority of which will be in the rural and semi-urban areas.

PM for pushing reforms, jobs & investment

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The new Government will revive economic growth and make it even more inclusive, Prime Minister elect Manmohan Singh said on Tuesday.

Singh, who was re-elected by lawmakers of his Congress party to lead the new coalition, said daunting challenges lay ahead as the global economy was passing through difficult times.

"Equally important is the challenge of reviving economic growth and creating new employment opportunities," Singh said in a speech to party MPs.

Growth in Asia's third-largest economy is expected to slow to a seven-year low of about 6 percent this fiscal year from around 7 percent in 2008/09, and from rates of 9 percent or more in the previous years. Millions of jobs have already been lost.

"There is some slowing down of investment and employment generation, we have to reverse this. We have to revive growth and make it even more inclusive," Singh said.

Economy to grow by 5.5-7.5 pct: CEA

Courtesy : Financial Express

As RBI projects Indian economy to grow by six per cent this fiscal, Chief Economic Adviser Arvind Virmani said the growth rate would be between 5.5 per cent and 7.5 per cent depending on when the US economy bottoms out.

The economy would grow in the range of 6.5 to 7 per cent this fiscal in case the US economy bottoms out by September this year, otherwise, it would expand in the range of 5.5 to 6.5 per cent, Virmani told reporters.

"... if you want the precise number of the optimistic scenario it can be 7 per cent, plus, minus 0.5 (per cent). It depends on what happens abroad. That's the main point because the external uncertainty is the main source of uncertainty here," he said.

"I can say categorically ... that even in this pessimistic scenario (After World Bank, IMF and ADB estimates of the GDP growth rate), India's growth would be higher than any of those three have indicated. It would definitely be higher than that," he said adding that about 7 per cent growth rate also depends on normal agriculture.

IMF projected Indian economy to grow by 5.1 per cent in 2009-10, the World Bank forecast growth rate of four per cent, while ADB has pegged the country's GDP expansion rate at five per cent.

Worries on Decling Inflation 

Courtesy : Financial Express

Cut in excise duty, reducing prices of aviation turbine fuel (ATF) and high base will bring inflation to zero level by the end of March, and prices would begin to fall by the middle of 2009, analysts feel.

 “WPI (wholesale price index) inflation will touch 0% by March end 2009, on the back of 2% excise duty cut, 7% cut in ATF prices and a strong base effect,” Axis Bank economist Saugata Bhattacharya said in a research note.

 In the middle of last year, inflation rose to 12.93%, way beyond Reserve Bank of India’s preliminary tolerance level of 5-5.5%. This prompted the central bank to tighten its monetary stance and raise key interest rates—repo rate (9%) and reverse repo rate (6%)—and cash reserve ratio (9%) in a series of steps.

 The tight money flow in the economy weakened the inflationary pressures, and inflation dropped to its lowest in last six years at 3.03%, in line with RBI expectations. The central bank estimates inflation to go below 3% by the end of the current fiscal.

 Consequently, RBI shifted its focus from inflation to growth, which has been hit due to tight credit condition and low demand. Through a flurry of measures since October, the central bank has injected more than Rs 4,00,000 crore. The steps include slashing of repo (overnight lending rate) and CRR to 5% each and reverse repo (overnight borrowing rate) to 3.5%.

 “With prices falling rapidly, we expect a period of deflation from the middle of 2009,” Goldman Sachs economist Pranjul Bhandari said in a report titled ‘Asia Economics Data Flash’. Axis Bank expects prices to fall starting April 2009.

 

The consumer price index (CPI) inflation, which better represents change in price of a household consumption basket, continues to be high, the note read. The CPI (industrial workers) inflation rose to 10.45% in January 2009 from 9.7% in December 2008. “This could possibly be due to higher retail food prices, particularly fruits and vegetables, in January as there was a transporters’ strike,” the bank said.

 However, it is likely to come down in the future with the cut in retail petrol, diesel and LPG prices on January 31 and the 2% services tax reduction on February 24 coming into effect, the note read.

Meanwhile, a Reuters Poll has estimated that inflation rate would drop to near seven-year low for the week ended February 28 due to lower prices.