Financial Daily from THE HINDU group of publications
Wednesday, Sep 14, 2005
Financial Daily from THE HINDU group of publications Wednesday, Sep 14, 2005 |
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Money & Banking
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Insight Industry & Economy - Economy Columns - Financial Scan Global growth alive and well S. Balakrishnan
OPINIONS on where the US economy is headed differ. There are those who think that a slowdown was imminent even before Hurricane Katrina and Katrina will only worsen the deceleration. Energy prices are the main culprit. They have risen so high that a much bigger slice of income must now be spent on gasoline and domestic energy consumption. Come winter and heating oil bills will soar if prices continue at these levels or rise further. All this means less discretionary consumer spending. And as two-thirds of GDP depends on this, any cutback will have significant adverse effects on growth. Clearly, there is a point here. A couple of decades ago, the phenomenon of rising oil prices would have had the Fed raising rates steeply to curb inflation. Today, the response is the opposite. Worried about a general setback from high oil and because of Katrina, there is a good chance of the Fed pausing in its rate-increasing mode. The fear of inflation may not have completely disappeared but it sure is no longer lurking in every corner. Interest rates can fall, money supply can expand, growth can go on but inflation need not result. The US made a quick recovery from 9/11. The last several quarters have seen GDP growth in the range of 3-4 per cent. Recessions have not become a thing of the past but they certainly are shallower than they used to be. In fact, the concern now is more about growth slipping below the 3 per cent level, which could have serious negative consequences for employment. Like in the case of inflation, recession risk is considerably less than it used to be. Optimists think Katrina may, at worst, reduce third quarter growth by 0.5 per cent or thereabouts. Employment will take a hit because of reduced business activity in the storm-hit States. But the fourth quarter will see a bounce back as reconstruction will give a fillip to demand and production. Time and tide have changed things. The world is no longer utterly dependent on the US, Europe and Japan. In any case, the latter two have not contributed much to the global economy in the last few years. The new kids on the block are China and India. There is no sign that these two emerging economic giants are affected by high energy prices. Predictions that China will slow have so far proved to be wishful thinking. Its Government's efforts to put the brakes on new investments on industry and growth have had little impact. Like China, India is also on a tear, although not at the same frenetic pace. The quest of the hundreds of millions of people in these two countries for a better life is unlikely to be dampened easily. It is more than likely that a macroeconomic-defying growth momentum is already in place. Unshackled creative and entrepreneurial energies and the relentless pursuit of higher standards of living will overcome the natural conservatism and lethargy of Governments and central bankers. The global economy has, in recent years, time and again displayed remarkable resilience in the face of the worst natural and manmade disasters. The resilience is likely to continue and maintain the pace of growth at decent levels.
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