WebSify
Follow us on
Mail
Print

The world of recession

Source : BUSINESS_STANDARD
Last Updated: Thu, Sep 06, 2012 20:01 hrs

The European Central Bank closed a landmark meeting on Thursday with its chief, Mario Draghi, saying that “the euro is irreversible” and that the Bank would prop it up by buying “unlimited” amounts of bonds from troubled euro zone governments. This is a departure for the conservative ECB — though it has hedged its support of the besieged euro-zone periphery with conditions. No government will qualify for the bond purchases unless it meets the stringent conditions for reform laid down by the euro zone rescue fund; if it diverges from those conditions later, the ECB will remove it from the programme. The bond buying, even if sterilised, is a brave move, coming as it does against the backdrop of a threatened credit downgrade of the euro zone as a whole. It is also an important step towards stabilising the euro zone, though it will likely not work to depreciate the euro sufficiently to restore export competitiveness, a crucial step towards restoring growth for the single-currency area. However, it is hoped that the decision to waive its “senior creditor status” for ECB purchases, placing it on the same level as private-sector credit, will help money flow to productive sectors of the economy and boost growth. Even Mr Draghi’s downbeat estimates of continued weak economic growth do not detract from the fact that this brings some temporary relief for the crisis-hit euro zone.

The news out of Europe is countered by some bad news out of the United States. Europe’s recovery has been held up as slower than the United States’ precisely because it has not been able to respond quickly and comprehensively enough to its slowdown. While the euro zone continues to see depressed growth – as does the United Kingdom – the United States has grown relatively swiftly, and has seen 29 consecutive months of private sector job growth. When non-farm payroll data are released on Friday, it will be seen whether it can be made 30 consecutive months; the Obama administration, gearing up for November’s election, will be anxious to avoid bad economic news. However, other indications show that the US economy’s recovery is far from as strong as some have been claiming, and may even be weakening. The number of jobs created in the second quarter of 2012 was only a third of those created in the first quarter. Data released this week showed that US manufacturing contracted for a third successive month in August, and construction spending fell, too, in July. Manufacturing has been the key source of growth in the US pulling it out of recession; but it appears employers are unwilling to keep on hiring. Some confirmation for that thesis came from unexpectedly high figures for US productivity growth this week, which went up by 2.2 per cent year-on-year in the second quarter of 2012. The US is also dealing with the real problems caused by political deadlock, with the “fiscal cliff” looming at the end of this year, when government spending must be cut sharply unless lawmakers agree on a smoother deficit-reduction plan.

Concerns about American recovery are matched by fresh worries about China. The People’s Republic, which has already reduced five-year growth targets to an unprecedented seven per cent, might be dealing with a further slowdown soon. Data last weekend revealed Chinese manufacturing may have contracted for the first time in nine months; and the purchasing managers index for the services sector was the weakest in a year. A manufacturing slowdown in China and the US will further hit raw materials prices — bringing mixed benefits to India. Overall, while the risk of a catastrophic euro zone meltdown is lower now, the world economy looks more recessionary than ever.




blog comments powered by Disqus
most popular on facebook
talking point on sify finance