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US economy back on track; IMF raises Asia forecast

US economy back on track; IMF raises Asia forecast
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First Published: Thu, Oct 29 2009. 11 30 PM IST

Healthy outlook: IMF building in Washington, DC. The fund raised its forecast for Asia, saying it would grow 2.75% in ’09 and 5.75% in ’10. Joshua Roberts / Bloomberg
Healthy outlook: IMF building in Washington, DC. The fund raised its forecast for Asia, saying it would grow 2.75% in ’09 and 5.75% in ’10. Joshua Roberts / Bloomberg
Updated: Thu, Oct 29 2009. 11 30 PM IST
A year after its worst tumble in more than seven decades, the US economy could be back on its feet.
The US department of commerce said on Thursday that the world’s largest economy expanded from July through September, after shrinking for four quarters in a row, a sign that the recession in that country could be over.
Healthy outlook: IMF building in Washington, DC. The fund raised its forecast for Asia, saying it would grow 2.75% in ’09 and 5.75% in ’10. Joshua Roberts / Bloomberg
The news came on a day when the International Monetary Fund, or IMF, provided further cause for cheer. The multilateral lender raised its growth forecast for Asia in 2010, even as it warned that the continent’s economic fortunes were linked to the health of the world economy.
Wall Street welcomed the strong US growth figures. The benchmark Dow Jones Industrial Average was up 82.90 points at 8.20pm Indian time, a rise of 0.85%. India’s 30-share Sensex closed down 230.77 points in a fourth straight day of losses across Asia.
“At this stage the numbers are just going to tell you the recession is over, and now the argument is going to centre on the speed of the recovery,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd in New York. “There will be a lot of naysayers after the numbers because ‘cash for clunkers’ did figure prominently in the quarter’s bounceback.”
Cash for clunkers was a stimulus plan in which the US government paid consumers to trade in their old cars for new and more fuel-efficient ones. The plan, which ended in August, boosted sales by about 700,000 vehicles, according to a US transportation department estimate.
Robust US government spending, exports, consumer spending—buoyed by the cash-for-clunkers programme—and housing helped push growth into positive territory. Spending on consumer durable goods such as cars shot up an astounding 22.3% at an annual rate, compared with a decrease of 23.3% the previous quarter.
But even if a recovery is technically in the offing, job seekers in the US likely will not begin to feel the benefits for months to come. In September, the US unemployment rate reached a 26-year high of 9.8%, up from 7.6%. Economists project the jobless rate will exceed 10% by early 2010. High unemployment dampens demand for consumer goods.
The US economic growth came without a major surge in inflation. The price index for gross domestic purchases, which measures prices paid by US consumers, increased 1.6% in the third quarter, compared with an increase of 0.5% in the second, the commerce department said.
Asia’s rapid expansion will remain below the levels seen in the decade before the economic crisis as consumers in the US and other large industrialized nations curtail their spending on Asian-made electronics, cars and other goods in the face of rising unemployment and other legacies of the downturn, the fund said in a report.
“Asia has not decoupled from the rest of the world,” IMF said, wading into a broader debate over whether the region’s prospects hinge on the West. “In fact, Asia’s fortunes remain closely tied to that of the global economy.”
The fund raised its forecast for Asia, saying the broader regional economy that spans countries from New Zealand to India would grow 2.75% in 2009 and 5.75% in 2010. That’s still below the average of 6.7% over the past decade. Both projections were about 1.5 percentage points stronger than those estimated by the fund in May.
Asian countries have been leading a recovery in the world economy, with growth accelerating since governments across the region loosened monetary policies and unleashed a torrent of spending to help shelter their companies and consumers from the drop-off in global trade and finance.
Except for China, India and Australia, whose economies are staging quicker recoveries than most, Asian countries should ensure government policies continue to prop up their economies next year, the fund said. Steps to restrain the easy flow of money, through interest rate hikes and other monetary tightening, won’t be necessary anytime soon because recoveries are still fragile and risks of inflation low.
Once the effects of stimulus programmes fade, however, Asia will ultimately need to find ways to make up for weaker demand in the West by increasing its local private consumption with the help of a broader social safety net and other reforms, IMF said.
Asia’s history of high savings and low consumption reflects a lack of state pension systems and affordable health insurance. Knowing there’s no safety net, Asia’s workers save more than they otherwise would while also using part of their incomes to support their parents.
IMF also warned against raising interest rates too soon. Doing so might not only sap the tentative rebound in most countries but exacerbate this year’s surge in prices of equities, real estate and other assets in Asia. That’s because investors would be encouraged to borrow money from countries with rock-bottom interest rates, such as the US and Japan, and direct it toward nations with higher interest rates, a practice known as the carry trade.
©2009/THE NEW YORK TIMES
AP, Bloomberg and a staff writer contributed to this story.
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First Published: Thu, Oct 29 2009. 11 30 PM IST