VR Logo

Lessons in Reality

Economic recovery will not be a ‘V’ shaped one, but closer to an ‘L’ with a long tail that rises gradually

The recession is over. Or is it really? There is a section of people that appears ready to uncork the bottles of champagne. Yes, humans live on hope. But optimism has to be tempered with realism. Expectations need to be founded on the basis of truth. The proverbial “green shoots” of recovery are visible, but it will take a while before these grow into stems and stalks of economic growth and enhanced trade, leave alone become luxuriant leaves and flowers of new employment opportunities.

The fact is that the near-term future is still fraught with uncertainty. Reports about the inaccuracy of Chinese data have been appearing with greater frequency. More importantly, what is increasingly apparent is that what happens in Beijing, Shanghai and Hong Kong will be exerting greater influence on the world and on India, and not just on Dalal Street. For the first time in recent years, the World Bank has predicted that in 2010 India may actually grow faster than China.

There are positive signals on the horizon. At the same time, there are indications that the upward movement in certain economic indices may be excruciatingly slow, that the recovery will not be ‘V’ shaped, but closer to an ‘L’ with a long tail that rises gradually. What is certain is that creation of jobs will take place long after the financial sector has revived. The International Labour Organization believes this process may not start before 2012 and could be as late as 2015. The World Trade Organization said international trade will come down by 10 per cent for the first time in living memory.

Close to seven million Americans lost their jobs in the USA since the recession began in December 2007 and a similar number have lost their homes as well. The situation is far worse in many developing countries. In the US, the number of homeless individuals remained relatively stable between 2007 and 2008, the number of homeless families rose by 9 per cent and in rural and suburban areas, this number jumped by 56 per cent, according to a report by the US Department of Housing and Urban Development.

In August, private employers in the US cut 298,000 jobs whereas 360,000 employees were retrenched in July. Between January and March 2009, US employers cut an average of 697,000 jobs each month. Even as the number of job losses fell to its lowest level in a year in August, the overall unemployment rate at 9.7 per cent was its highest level in 26 years, that is, since June 1983. A Reuters survey indicated that most big banks in the US expected the jobless rate to peak by the first quarter of 2010.

The International Monetary Fund revised its forecast and stated that the world economy would shrink by 1.3 per cent during 2009 (instead of 1.4 per cent forecast in April); for 2010, the growth projection is up from 2.5 per cent in April to 2.9 per cent in September. The United Nations Conference on Trade and Development is more pessimistic in a report released on September 7. It has predicted that the world economy would contract by 2.7 per cent in 2009.

It is more than a year since September 15, 2008, when Wall Street melted down with Lehman Brothers, Merrill Lynch and AIG (American International Group) simultaneously collapsing, triggering a near-complete breakdown in the working of the financial systems in developed countries. Iceland went bankrupt.

The fact is that the financial upheaval is yet to run its full course and has left deep economic scars on most countries in the world. We in India should consider ourselves fortunate to have been saved from the worst impact of the global economic crisis.