Post Recession Blues



Post Recession BluesAnil Kumar Satapathy

Last week there was a slew of news on the much awaited “end of recession” - pushing up markets all over the world. While economies like Canada, Hong Kong and Israel have posted better figures in the second quarter, the Australian central bank chief has indicated shallow recession.

Similarly, industrial countries like France and Canada have declared that they are now out of recession. The Eurozone too has put forward an optimistic view despite a negative Q2 growth of 0.1 percent compared to a fall of 2.5% in first quarter.

Meanwhile, two major economies – the China and India - touted as the engines of world growth in the 21st century, have reported healthy rates. Policymakers are also upbeat about the way the US economy is shaping up. The US Federal Reserve has said the country`s economic activity is bottoming out and financial conditions have improved. “The worst is behind us,” seems to be the commonly used phrase by the economists.

With all the “good news” bombarding the board room from all directions, policy makers are beginning to think about the next level of challenges, which would be much more critical than the current ones.

Inflation

Every action has an equal and opposite reaction, said Newton. This holds true for the current financial conditions too. The way governments world over have announced bailouts for their respective economies, huge amount of cash has flooded the market. Now, as the demand picks up, money in the market tends to up the prices spontaneously. This makes things murkier.

Central banks have already called for sucking out the excessive money.

"As the global economy starts recovery, a calibrated exit from this unprecedented accommodative monetary policy will have to be ensured to avoid recurrence of the financial crisis being experienced now," RBI Deputy Governor Rakesh Mohan said.
Worries are not unfounded. While the US government has given a bailout of around USD USD 787 billion, Beijing has pumped in nearly USD 600 billion, Japan USD 270 billion, France USD 31 billion.

Infact, Neil Barofsky, special inspector general for the US Treasury’s Troubled Asset Relief Program, has warned that the Obama government’s bill to pep-up the economy may go upto USD 23.7 trillion. According to Neil, it includes USD 2.3 trillion in programs offered by the FDIC, USD 7.4 trillion in TARP and other aid from the Treasury and USD 7.2 trillion in federal money for Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal programs.

Apart from this, Central bankers of most countries have slashed their rates aggressively towards zero to ensure enough liquidity in the market – releasing trillions of dollars as loans into the market.

Though most of these packages are meant for their respective countries, in a highly globalised world, no country is isolated. With more money coming into their hands, people are more likely to buy more after waiting for the 19-month long recession period. This will push up the prices. For countries like India, which is already witnessing high food prices with a delayed monsoon jeopardising food production, increase in prices of other commodities will worsen the situation.

CEOs’ dilemma
It is difficult to think of a climax when you reach there. Since there is no clear demarcation as to when we have reached the climax, changing tactics would be difficult for the strategists when the economy has just recovered from the biggest slump of the world in 80 years.

They have to fight the expectations of the employees as to whether to dole out sops to keep the best intact or to wait for some more time. It is a double-edged weapon. While in post recession situation retaining employees is hard as job offers flood the market, providing an increment will ensure inflated budget and diminish the chances of business expansion. The employees, on the other hand, with bruised egos, as they have not received any hike, may be looking for a better job offer elsewhere.

Investors

There is an equal dilemma on the investor front. The recent stock market rally in India and elsewhere has shown that investors are confused about putting their hard-earned money into the market. Nobody is sure as to whether the recession has really ended or it is just a bear market rally.

Investing in these troubled times may cost one his entire savings or can also provide him a return of the lifetime, if the overall situation turns out well.

Customers

Consumers worldwide have responded equally to the recession – cutting down expenses, saving every penny. All of a sudden they are bombarded with news that the recession has ended. It is a very difficult thing to comprehend. The world remains the same for them. Less or a stagnant pay makes them very sceptical of spending. Now they are told that the time is over for cheaper products; expensive goods are coming.



“Should I buy or should I wait for some more time when I will have more bucks in pocket,” the consumer must be thinking.

“Start writing your post-recession plan,” roared a banner headline of a popular news website, summing up the sentiment in these tumultuous times.

Fiscal deficit

Fiscal deficit is another worry for the government.

In a bid to push up the growth, governments all over the world have invested heavily to mop up growth and create jobs in a bid to fight the slowdown, often borrowing from the market or other sources.

Recently, the Leader of the Opposition party in Britain warned that the country could default on its debt. The UK has a fiscal deficit of over 12 percent.

It is one of the biggest talking points in the United States whose deficit has zoomed to 11.2 percent of GDP or USD 1.58 trillion (according to official on condition of anonymity, a formal announcement likely next week). So severe was the situation that big lenders to the US, like China and Russia had even asked Washington to respect its commitments. They were also demands for replacing dollar as the world reserve currency.

The case was no different in India, which by far was not so severely affected by the global crisis. India’s spending on the social sector jumped several folds putting severe strain on the government’s coffers. According to an estimate of Goldman Sachs, India’s fiscal deficit, including that of the Centre and states, would be among the highest in the world and likely to be 10.3 percent of GDP in the current fiscal and 10 percent in the next fiscal.

India’s budget envisages a large increase in Central government spending, both in the current and next fiscal, making the central deficit rise to 6 percent of GDP in 2008-09 and 5.5 percent in the next fiscal, Goldman Sachs added.
China, the second largest economy in the world, is also battling with fiscal deficit of 950 billion yuan (USD 139 billion – March 2009 estimates) for 2009, a record high in six decades. The deficit, on account of high spending to cushion the impact of the global financial crisis, accounts for less than 3 percent of China`s GDP.

Usually, a country`s fiscal condition will be viewed as risky if the deficit accounts for more than 3 percent of GDP or the outstanding government bonds exceed 60 percent of GDP, according to the usual international practice.

The International Monetary Fund has warned that rising public debt of the major developed countries could undermine efforts to spur economic recovery.



"With a delayed withdrawal investor concerns about sustainability may increase, leading to higher interest rates on government paper, undermining the recovery and increasing risks of a snowballing of debt," IMF said in a report in July.

It predicted that public debt would represent around 120 percent of gross domestic product by 2014 in the nine advanced economies of the Group of 20. That would represent a whopping 40 percentage point increase since the start of the global financial and economic crisis in 2007.

The report highlighted growing debts in the Group of Seven countries – Britain, Canada, France, Germany, Italy, Japan and the United States – and Australia and South Korea, two other major economies in the G20.

The average debt-to-GDP ratio of the G20 developed and developing countries, which stood at 62.4 percent at pre-crisis levels in 2007, rose to 82.1 percent in 2009 and was expected to hit 86.6 percent in 2014. The average ratio for the developed countries would rise from 78.6 percent in 2007 and exceed output at 100.6 percent this year. By 2014, it was projected at 119.7 percent.

Conclusion:

Someone rightly said that though one initially complains, groans and curses recession, it is the ultimate natural remedy to flush out the dirt from the system. But the treatment won’t happen automatically. And, bad treatments will only prolong the recession further, which will heighten the already existing grave human miseries.