|Time to cool off|
|Thursday, 02 June 2011 00:00|
The Great Recession is technically seen as having ended back in 2009, as unprecedented stimuli and central bank intervention were harnessed to pull the US and Eurozone out of the biggest crisis since the Depression. While growth is back, there seems some softening of late. After growing 3.1% in Q4 last year and 2.6% in the quarter before that, Q1 GDP for 2011 in the US grew 1.8%, thanks partly to a fall in government stimulus which took away one percentage point from growth. The Conference Board’s consumer confidence index, the most widely recognised index in the US, dropped from 66 in April to 60.8 a month later. This is on the back of an official confirmation of a double-dip in home prices across America by the Case-Shiller index, a leading constant quality house price indices from S&P, which showed a 3.6% fall in March from the same quarter annualised, and is the weakest the gauge has been since March 2003. Given how homeowners have negative home equity, the houses are worth less than what the owners paid for them, this will force them to save more. Not surprising then, that as compared to Q4 2010, consumer demand added a lot less to Q1 GDP—1.53 percentage points in Q1 versus 2.79 percentage points in Q4 2010. Moreover, that manufacturing expanded at the slowest level in 7 months in both the US and Eurozone, compounds concern. The Institute for Supply Management’s manufacturing index for the US declined to 57.2 in May, from 60.4 in April, while Markit Economics’ manufacturing index for the Eurozone dropped to 54.8 in May from 58 in April.
The natural reaction is to spend more, and certainly countries like Germany have healthy enough balances to do so. Apart from the fact that the budgets of most countries like the US no longer allow for that luxury, the last thing the world needs is a third round of Quantitative Easing by the US which, more likely than not, will push up global inflation and, with flows increasing in emerging markets, interest rates there will also rise. Maybe the slowing will have a sobering effect on prices of commodities including oil which are really the cause of high inflation in countries like India—any more inflation, largely global in origin, will leave RBI no option but to follow policies that will choke off GDP growth.