Unusually Uncertain

"Unusually uncertain” were the two words that Ben Bernanke, the Chairman of the Federal Reserve of United States, said about the state of economic recovery on July 21st 2010. After the remarks were released, the US stock market fell sharply which were followed later with subsequent fall in the Asian and European markets.

After showing signs of recovery in early 2010, the global economic outlook has deteriorated during the last couple of months. Economic growth in major advanced economies has been tepid at best, and the much talked about “green shoots” of recovery witnessed during mid 2009 hasn’t materialized into full scale economic expansion.

The unemployment rate in the US hasn’t budged from 9.5 percent to 10 percent range during the last one year. The high unemployment rate shows that business confidence is still low and companies aren’t hiring despite the recent surge in their profit. Household consumption accounts for over 70 percent of the US Gross Domestic Product (GDP) and because of struggling job market, households are chary of spending. As a result, savings rate in the US has increased after the global economic crisis: from a pre-crisis negative savings rate, the US household savings rate has recently increased to over 6 percent. One of the major reasons of global economic crisis was over-consumption of US households; hence, the increment in savings rate is good for the long run. However, in the short run, the US economy desperately needs its consumers to spend more to boost its growth prospects, which looks unlikely given the current US job market situation.

And, if leading experts are to be believed, US job market won’t improve any time soon. Mohammed El-Erian, chief executive officer and co-chief investment officer of PIMCO - the largest fixed income manager in the world - recently said that the US will witness a “lost decade” of jobs growth. Bill Gross, founder and Managing Director of PIMCO was first to coin the term “New Normal” in early 2009 to describe a prolong period of slow growth and high unemployment for the US economy.

When leading economists and central bankers from around the world gathered recently in Jackson Hole, Wyoming to discuss the future of the global economy, the mood amongst the members of this elite group was reported to be much somber. Having already taken unprecedented steps to bolster economic performance

after the crisis, central bankers have plenty to think about

given the daunting prospect of ‘double dip”. Speaking at the Jackson Hole Symposium, Bernanke reiterated his earlier comments about uncertain course of economic recovery and added that US growth will remain subdued for rest of the 2010 and that US economy will grow, albeit slowly, in 2011.

Few significant events have contributed to uncertain business environment which subsequently had an impact on economic performance of major economies. When the “green shoots” of the recovery first emerged during the second half of 2009, business confidence started to recover. However, much of the progress was dented when credit problems surfaced in Dubai in late 2009. Before the problems in Dubai were sorted out, Europe started to have its own debt problems. Overnight, the Credit Default Swap (CDS) - a risk measure of bond’s likely default - on the sovereign bonds of Portugal, Ireland, Greece and Spain (so called “PIGS” countries) increased to unprecedented levels. Much of the first quarter of 2010 was plagued with sovereign debt issues of Europe.

All these events have made businesses and investors wary about the next round of problems. As a result, business confidence has come down. And this has been reflected in the slow growth numbers. Recently, the US revised its second quarter economic growth from 2.4 percent to 1.6 percent. Japan grew at an annualized rate of paltry 0.4 percent. Yields on the US government bonds are incredibly low indicating investors’ flight towards safety.

What then does this slow growth and uncertain environment mean to the rest of the world, especially to emerging economies? If the recent economic performance of India and China is to be believed, then not much. India recently clocked an 8.8 percent growth in April-June quarter - highest growth figure after 2007. Indian policymakers are talking about the need to raise key policy rates to tackle high inflation. China has also been growing at its usual rapid pace. These are signs that, maybe, some of these emerging economies have started to decouple from the developed ones. However, it will be premature to assume that China, India and other emerging economies have fully decoupled from the US and other developed economies. One only needs to go as far as 2008 to see how the whole “decoupling” theory was turned on its head. Hence, as of now, “unusually uncertain” seem the right choice of words.

First published on the Kathmandu Post on Sept 13, 2010.
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