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Not yet at end of the tunnel

Not yet at end of the tunnel
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First Published: Mon, Aug 04 2008. 11 10 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Mon, Aug 04 2008. 11 10 PM IST
The global economy is getting its first doses of good news in a year. The mess out there does not seem to be as deep as most had assumed at the beginning of the year, which is one reason why the stock markets have bounced up a bit over the past fortnight. But the global economy is not out of the marshes as yet.
Illustration: Jayachandran / Mint
One bit of good news is well known. A lot of attention has been lavished on the decline in oil prices — from a peak of around $145 a barrel a month ago to around $125 today. The drop in oil prices will offer some breathing space to countries that have had to battle rising fuel subsidies and wider current account deficits. India is one such country. But oil prices are still high enough to push these countries towards fiscal and balance of payments crises.
The other bit of good news has come from the US — even though there are still too many hidden bombs there as well. The US Bureau of Economic Analysis said last week that the world’s largest economy grew in the second quarter at an annual rate of 1.9%. That means that the US has not yet gone into recession, if we take into account the standard definition of a recession as two consecutive quarters of gross domestic product declines. That is good news for the rest of the world.
The surprisingly strong growth in the US economy is because of a few factors. The decline of the dollar helped the US increase net exports. Personal consumption grew because of the cheques that the US government has sent to households as part of the fiscal stimulus plan. Export growth will stay strong only if the rest of the world — especially Europe and Japan — sees robust growth. The signs there are not very encouraging. The fiscal stimulus that households have spent is a one-time gift in the mailbox. And unemployment continues to climb. The US Bureau of Statistics says that non-farm payrolls fell by a further 51,000 in July.
The decline in oil prices and the fact that the US has managed to avoid a recession have raised hopes that the world economy has managed to avoid the worst havoc that the bursting of the housing bubble and the credit crisis could have wreaked. This resilience is both unexpected and admirable. But the underlying problems have still not gone away, be it the continued decline in housing prices in the US and Europe, the mounting losses in the financial sector there and the fiscal strains in many emerging economies. The excesses of the past five years have not yet been worked out of the system.
Is the global economy out of the woods? Write to us at views@livemint.com
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First Published: Mon, Aug 04 2008. 11 10 PM IST