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A sputtering economic engine

A sputtering economic engine
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First Published: Mon, Jul 04 2011. 09 32 PM IST
Updated: Mon, Jul 04 2011. 09 32 PM IST
The global economy is in the initial stages of a synchronized slowdown. Friday saw the release of data on factory output in most major Asian countries, including India. The purchasing managers’ index (PMI) for India fell for the second month in a row, from 57.5 in May to 55.3 in June, the lowest reading in nine months. A reading above 50 indicates that manufacturing activity is expanding. South Korea also saw a weaker PMI for June.
However, the most important decline took place in China. The HSBC Markit Economics PMI fell from 51.6 in May to 50.1 in June. The Chinese government’s official PMI— yes, it has one—dropped from 52 to 50.9. Both suggest that China is very close to a contraction in factory output in the world’s industrial hub.
The Asian data comes at a time when there are problems galore in the developed nations. Most peripheral European countries are either on life support or would need to be hooked on soon. The International Monetary Fund has said in a new report that it expects weak US growth for a few more years.
In Japan, a survey of business confidence conducted by the central bank shows that the mood there is at its gloomiest since the depths of the financial crisis. Japan may claw out of the hole as more of its industrial capacity comes back on stream as the country recovers from the aftermath of the earthquake and the tsunami, but it is no longer an engine strong enough to pull along a sluggish global economy.
However, there continues to be an important difference between Asia and the developed nations. The slowdown here has been willfully engineered by tighter monetary policies aimed at curbing inflation. So the downturns at home and in the neighbourhood are cyclical. The problems in Europe and the US are more structural, and have persisted despite massive government spending and zero interest rates.
Unprecedented fiscal and monetary stimulus saved the global economy from a meltdown in early 2009, but the underlying problems—be it a careless financial sector or low savings rates in the US—continue to fester as governments in the West fight shy of tough decisions. The recovery is dissipating, as expected.
What will it take to inject life into the global economy? Tell us at views@livemint.com
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First Published: Mon, Jul 04 2011. 09 32 PM IST