US will continue to bond PDF Print E-mail
Wednesday, 12 June 2013 01:17
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Little reason for worry for another 6-8 months at least


There is little doubt, as the graphic in our lead column on the right makes clear, that countries with higher current account deficits are the ones whose currencies tend to be the most under pressure when there is the slightest bit of global uncertainty. The current uncertainty has been caused by a complete misreading of US Fed chairman Ben Bernanke’s statements, but this is not the first time the rupee has come under pressure in recent years. Fixing that means India has to change its anti-FDI policy—witness the number of barriers put to block FDI in retail after the UPA risked its government to get the proposal cleared in Parliament. For what it’s worth, chief economic advisor Raghuram Rajan said on Tuesday that the government would soon be recommending a hike in FDI caps in various sectors. Equally, the government needs to deliver on promises to bring in more private players into coal production given that coal imports are now around 1% of GDP. And while gold imports are no doubt an important factor in the worsening CAD, the real issue is the collapse of exports.

The immediate issue, of course, is whether Bernanke is going to start rolling back the $85 billion of monthly bond purchases. The belief was strengthened by the US’s 2.4% Q1 GDP growth in the face of a 4.9% contraction in government expenditure. In the June quarter, thanks to a reclassification of accounting norms to take into account expenditure on R&D for instance, GDP is expected to grow 3%. US jobs growth of 175,000 in May on top of 165,000 in April, and S&P raising its outlook on the US to stable on Monday have also served to cement the view a US recovery is around the corner. That may be a bit premature. For one, as the IMF estimates, the US needs to cut its primary deficit by 0.9% of GDP each year till 2020, so government expenditure is going to be under pressure for a long time. As a result, while jobs have risen, these are low-paying jobs compared to the government and higher-paying factory sector shedding 11,000 jobs last month—in other words, the consumer recovery, the weakest in decades, will likely stall. More important, given Bernanke’s bond-slowdown was predicated on a fall in US unemployment rate to 6.5%, keep in mind that the May growth in jobs was accompanied by a rise in the unemployment rate to 7.6%—as the economy is recovering, more people are coming back to look for jobs. Which is why the S&P economic forecast (read it on the Reflect page today) for the US is interesting—it has lowered its Q2 forecast (not factoring in the accounting boost) to 2.1% and full year growth is expected to be 2.5% as compared to the higher 2.7% estimate in February. S&P’s forecast is US unemployment is unlikely to fall below 6.5% till early 2015. In other words, it’s too early to don the sack cloth and ashes and the UPA has some more time to get its act together. Assuming its preoccupations extend beyond getting the Food Security Bill through.

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