Persisting uncertainty

Economic indicators from the United States and other developed countries, since the beginning of August, strongly suggest, at the very least, heightened uncertainty over their near term growth prospects. That the industrial countries, as a group, were expected to trail the developing nations in the recovery phase was anticipated. But now even the modest growth rates they were expected to register seem to be slipping out of their reach. According to recent data, the GDP of the OECD countries increased by 0.7 per cent on a sequential basis in the second quarter of 2010, same as in the first. Germany with a 2.2 per cent growth, its highest since unification, tops the table. Growth in the United Kingdom at 1.1 per cent was fairly satisfactory, while the economies of Japan and the U.S. slowed to 0.1 per cent and 0.6 per cent respectively.

Although there appears to be no real danger of a “double-dip” recession, it is clear that the rebound has not only been uneven but remains fragile in a majority of the developed countries. Recent developments in the world's largest economy, the U.S., are hardly reassuring. There is a realisation at the highest levels that the economy, which has slowed down, is not expected to recover soon. Recently, the U.S. Federal Reserve, while pledging to keep interest rates low, has identified major obstacles to growth that are of far-reaching socioeconomic significance: high unemployment, modest income gains, eroded housing wealth, and tight credit markets.

The financial markets, forever focussed on the macroeconomic news emanating from across the globe, have few definite trends to latch on. On balance, negative news outweighs positive ones. In the developed countries, investors are waking up to the painful reality that growth will be slow in many parts of the world. Policymakers in many countries are facing a difficult situation. Certain decisions, such as withdrawing the stimulus measures, are particularly hard to reach with any degree of confidence and, even if decided upon, are difficult to implement. It is highly unlikely that a consensus on the lines reached at the G20 is possible at this juncture. Indian stock markets, propped up by generally positive domestic economic news, nevertheless face a great deal of uncertainty as well. The theory that India and other emerging markets are “decoupled” from the developed ones has been disproved long ago.

Not just stock markets, but the entire macroeconomy has to reckon with the trend of foreign capital inflows that have become crucial to the country's external sector. Either too little or excessive flows would entail substantial costs for the domestic economy. Hindu News