The Hindu Business Line : Engine resumes rolling

For a whole year from July 2008, the US economy produced less and less in each successive quarter. This contraction led to a global slowdown, spurring the entire world to follow expansionary fiscal policies. Even in this, the world was led by the US, which pumped in a trillion dollars to stimulate the economy. The effects of that stimulus have become visible in the third quarter of 2009 during which the US economy expanded its output at an annualised rate of 3.5 per cent. Whether this will be sustained remains to be seen. But the chances are that, barring another major shock, it will. So even though the official announcer of the end of recessions in the US, the National Bureau of Economic Research, is yet to say that the recession has ended, it would not be wrong to be cautiously optimistic.

The importance of this for the world economy cannot be over-emphasised. Although many experts had been saying that Asia had de-coupled itself from the US economy, the global slowdown of the last 12 months has emphatically shown that it has not. This was brought home sharply to China of course, whose exports sustain its phenomenal growth rates, and India, too, which had thought that its economy was mostly driven by domestic demand. For it the shock was ruder. Un-noticed by anyone, it had integrated to a high-enough degree with the global economy over the last decade to feel the bump of a slowdown in the US. As the Reserve Bank of India (RBI) has pointed out, nearly a third of Indian GDP was accounted for by imports and exports. So the US turnaround is most welcome here, for exports of both goods and services from India will start to grow again after more than a year of contraction. This means higher GDP growth and therefore, as a destination for foreign investment, higher inflows. That will create a different problem of accretion to domestic money supply and therefore a tendency towards higher inflation. But when is there ever any pleasure without some pain?

All this will unfold over 2010 and 2011. Looking beyond 2011, two larger questions will need answers. One is the period over which the US will restore its fisc to some sort of good health; the other, following from this, is the prospect for the dollar. When the smoke puffed out by economists clears away, only one question remains — will the dollar cease to be a reliable store of value? Much of the answer to this will depend on the speed and strength of the US recovery. If it is rapid and robust, the dollar will continue to rule the roost; if it is slow and halting, it will still be the first preference of traders and investors but a somewhat volatile one.