New Delhi: Chief international economist at dutch financial services company ING Group NV, Rob Cornell says he doesn’t foresee a V-shaped recovery from the global economic recession. Cornell, who has worked for the UK government and who was previously senior international economist with the Commonwealth Bank, expects more nasty surprises from the global financial sector. In an interview, Cornell cautions India against rushing towards full capital account convertibility. Edited excerpts:
What is your view on the nature of the current economic crisis?
This is the worst recession we have seen since the Great Depression. This comes after 10 years of exceptionally strong credit growth that central banks really didn’t seem to be aware of or concerned about, leading to a succession of asset price bubbles. The reason why it is particularly bad is that it has dragged the financial sector down and you cannot have stable economic growth without a healthy financial system. That is why it looks more common like the Great Depression.
How far are we from the bottom?
More bad news: Rob Cornell of ING Group says banks will inevitably need more capital injection. Ramesh Pathania / Mint; Location: Hyatt
That is the $69 trillion (Rs3,484.50 trillion) question. I think you have to be quite careful in defining the bottom. What you actually believe in will signify the turning point. The difficulty is the US will have negative growth for some time, probably throughout this year. I think you might see the negative growth to decline in the second half of the year to smaller negatives. I think in this environment, that is a turning point. There is going to be no V-shaped recovery. This is not a downturn that will bounce (back).
Could you explain why we will not have a V-shaped recovery?
Well, this is because of the amount of debt, not only in the US but also in the UK and Europe, to a certain extent. The process of unwinding is actually going to take a very long time. It has taken 10 years for this debt to go up—not only mortgage debt, but consumer debt and credit card debt as well. Getting debt levels down is very difficult once we accumulate that. And we keep on borrowing to sustain spending because we cannot access wealth through the assets now. The housing (price) which was the biggest stock of wealth, those houses are not 30% worth the value they were 18-20 months ago.
And what could be the early signs of recovery in the US?
I would look at a couple of things. The initial weekly jobless data are important. The labour market is very important in recovery. People often talk about the labour market as a lagging indicator, it isn’t really. It actually tracks GDP (gross domestic product) growth fairly closely. Another encouraging factor would be slowing rate of decline of house prices. (However), we are not going to see a rise in house prices.
Has the financial sector mess revealed itself completely or could more surprises be on their way?
The thing to remember is that 2007 was about the housing market subprime (crisis), 2008 was all about financial sector losses and 2009 is very much a macroeconomic story. Continuously, the macroeconomy is showing some deterioration and banks have to make write-downs.?The?financial sector problems will continue. If you want to be optimistic, you could probably say we are beyond the halfway point. Inevitably, there will be more bad news. Banks will inevitably need more capital injection.
How do you view the growth scenario in India?
I am a G-7 (Group of Seven) economist, I know very little about anything outside our region. As an external observer, I can give you my ignorant take. There are a number of things going in favour of India. One is that it is a relatively closed economy, and it has a big domestic sector. Again, the fact that India does not have a fully convertible currency, does not have complete liberalization of the capital account, has been a definite benefit. All the received wisdom that the free market is always the best scenario... I think economists will now think more about it. Perhaps some openness with some control (is needed) at the same time.
After the financial crisis, now it seems it will be difficult for India to go for full currency convertibility.
There need not be any rush for going in that direction right now. The inflow of capital tends to magnify all the worst effects. Typically, when countries have liberalized their capital account, except a few occasions, they have experienced a financial crisis. That is why China has been very wary about this. It has painstakingly tried to sequence liberalization so that it (financial crisis) does not happen. I think even this sequencing argument may not guarantee against the financial crisis. But there are arguments in favour, that if you do not fully liberalize markets then it is a deterrent to capital. It may slow you down in good times, but it can be a protection in bad times. You need to be very, very sure that it is going to be the right policy at the right time and it is done in the right way. No headlong rushes, it is my guess that policymakers worldwide would be saying this.
Headline inflation rate in India is close to zero. Is the threat of deflation a real one?
It’s real. I don’t want to make any specific comment about India because what I gather is the Wholesale Price Index is a bad measure of inflation... There is headline deflation and there is deflation deflation. When we talk about deflation?in?an?economic?sense, the thing we are trying to avoid is not just the Consumer Price Index going down. It can go down in a number of phases. It can go down because the oil prices grew very, very rapidly...(and)?this year they are not.
When we talk about deflation, we talk about wholesale prices going down, wages coming down, consumer prices coming down, asset prices coming down, house prices coming down, stock markets falling. That is when you got a deflation problem. That is when the psychology of deflation kicks in, when people are not buying assets, not buying goods. They are waiting for things to get cheaper, year after year. I think in most economies we are far away from that. We should avoid that in the US as well. If politicians sit back and do nothing, that is when the economy will go down.