S. Balakrishnan

The dark economic and financial clouds of 2008 are gone. Armageddon seemed to be staring in the face globally. It was staved off, thanks to the sagacious interventions of Governments and central banks, which provided every dollop necessary — liquidity, practically interest-free money, bank capital and fiscal stimuluses — to salvage the situation.

It's worked. Who said throwing money is no way to solve problems?

As we get into 2010, what's the outlook? Will the recovery continue? Or will the US, in particular, lapse into another recession?

Job creation

The Nobel Prize winning economist Joseph Stiglitz strongly advocates an aggressive programme of Government spending to create jobs, which is the one missing (and most important) ingredient in the revival. There's little doubt that the man on the street has been left behind amidst the trillion dollar packages to save banks. Those responsible for the crisis were not only rescued but paid huge bonuses out of the risk- free easy profits from zero-cost money provided by Governments.

At least to redress the imbalance, the US President, Mr Obama and his advisers will surely focus on employment-increasing initiatives next year and never mind the deficit. The private sector lags in restoring lost jobs and adding new ones to absorb those joining the labour market. A ‘do nothing' policy in this situation would be disastrous economically and politically.

Thus, the US employment should pick up significantly in 2010. Jobs mean incomes and are confidence boosters both for consumers and businesses. Signals are extremely positive — hiring of temporary workers is up and H1-B visa quotas for expats are almost exhausted.

Employment generation will be aided by soft Fed policy. Its benign interest rate stance should continue well into 2010 as inflation stays low because of weak demand, manufacturing capacity slack— industrial capacity utilisation is only 70 per cent — productivity gains and global competition.

What about financial markets?

Stock prices have doubled and more from their lows in China and India. The Dow Jones Industrial Average is firmly entrenched above 10,000. Corporate profits came back this year and look set to improve in 2010. Nice omen for equities the world over.

Buoyant stocks are an unmixed blessing, enabling companies to raise capital easily for their projects and reduce debt dependence.

The biggest driver for equities is the lowest central bank interest rates and Government bond yields in decades in every major economy.

The dollar has started a comeback in late 2009 and this will continue. It could gain particularly sharply against the Japanese yen. Sterling is due for better times versus the euro.

Commodities are a different matter. If there's one factor which has the potential to derail the global economy, it's an upsurge in energy and food prices. The risk of the latter happening is especially high.

Apart from commodities, the other worry is emerging market property, where prices have risen sharply this year, thanks to low interest rates and foreign investment. However, it doesn't pose systemic risk. The US, on the other hand, needs precisely stable house prices. Its wish will be granted.

Lower risk perceptions, as the US sustains growth and jobs, are negative for gold prices, despite worries about Governments continuing to print money and budget deficits.

The global economy and financial markets are on course for a good 2010.

(This article was published in the Business Line print edition dated January 1, 2010)
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