New Delhi, Nov 28: The US economy’s sizzling 8.2 per cent annualised growth rate in the third quarter of the calendar year, the fastest in twenty years, is the latest indication that the global economy is on the mend. The encouraging signal from the GDP data is that it’s no longer only the US consumer who is supporting the US economy but that business spending on inventory has also picked up.
To be sure, everybody predicts a significant slowdown for the US economy in the fourth quarter, and there’s little doubt that Q3 growth owed much to tax cuts and easy money.
But with inflation under control, the US Federal Reserve is unlikely to raise interest rates soon, which means that consumer spending will continue to be robust, while any deceleration in retail spending will be made good by increased business outlays.
The Organisation for Economic Cooperation and Development’s Economic Outlook, released on Wednesday, talks of ‘animal spirits’ being back in the US economy.
The OECD puts next year’s US GDP growth at 4.2 per cent. That’s good news for the world economy, since the US continues to be its engine of growth.
Moreover, it’s not only the US economy that is turning round — the Chinese story needs no reiteration, while even sclerotic Japan and the Euro zone are showing signs of recovery.
What does this mean for India? It’s good news for exports, of course, and growth may in fact counter the recent tendencies towards protectionism in the US.
India’s software services companies have already pointed to a levelling out of billing rates and a revival of capital expenditure on technology will be a great help.
At a time when domestic demand in India is likely to rise significantly, thanks to a good monsoon, higher manufacturing and service exports will provide an additional boost.
Furthermore, there are concerns that China’s extraordinary rate of growth may not be sustained next year, and growth in the US economy will help take up the slack.
In other words, the fears that slowing Chinese imports may hurt commodity prices may be unfounded, as US, Japanese and European growth kick in.
What’s more, with the Federal Reserve committed to keeping interest rates low with a weak dollar, and with strong growth, emerging markets will continue to look attractive, ensuring dollar flows to them. India, as one of the fastest growing economies in the world, will benefit. What could go wrong? The behaviour of the US stock market, which has remained range-bound in spite of very bullish data, provides some clues.
Add to that the recent topping out of Asian markets, and the suspicion is that global equity markets have already priced in the best-case scenario.
The weaker dollar is a wild card, and its impact on financial markets is a question mark — recent data show a significant falling off of Asian investment in the US bond market, which could become a problem if it is sustained.
Sceptics have continued to question the sustainability of US growth, based as it is on massive fiscal and monetary stimuli.
And finally, the basic imbalance in the US-centric world economy — the massive US current account deficits and the need to finance them — continues to be an underlying concern.
In short, while a short-term bounce is in the offing, there are still too many uncertainties with regard to the longer-term outlook.