Market research shows that lists are extremely popular, hence apparently the profusion of top tens and top twenties in the media. I have my own — a list of words and phrases that I am unlikely to use in my columns for 2009. I suspect other columnists could produce similar lists on request. These are some of the buzz-words and catch phrases that hogged the headlines at some point in 2008 but are now passé. If some of them start to reappear in newspaper columns, the global economy and financial markets might be due for quicker recovery than we anticipate. Here they are:
‘De-coupling’: The notion that even if the US economy were to slide into recession, emerging markets (particularly those in Asia) would retain their momentum. Fund managers, keen to prolong the bull run of the past few years, kept touting it through the first half of 2008. This led to a run-up in emerging market stock prices that subsequently cooled off but its effects lingered on in the commodity markets up until August. Most economists argued against the idea because it failed to recognize that the global economic and financial system had become more integrated. The Asian Development Bank argued that the fact that Asian countries seemed to trade a lot with each other was no insulation from the US economy. Much of the trade is in industrial intermediates and the final goods were ultimately sold to the US. August was the sell-by date for ‘decoupling’ and by October, it had entirely disappeared from the shelves.
‘Strong’ and ‘fundamentals’: The injudicious use of both words in the same sentence laid John McCain’s aspirations for the US’s top job decisively to rest. The only adjective that is likely to go with ‘fundamentals’ in 2009 is ‘weak’. Most economists and research agencies are predicting a full-blown global recession that might just make 2008 look like a party. If you thought the IMF’s forecast of 2.2 per cent growth for the global economy in 2009 was dismal enough, the World Bank has come up with a forecast of 0.9 per cent. One of the reasons for this large difference is the gap between projected growth rates for the Asian majors like India and China. While the Fund sees India’s growth in 2009 at 6.3 per cent, the Bank projects 5.8 per cent.
‘Central bank independence’: Close coordination between fiscal (finance ministries) and monetary authorities is in. The belief that monetary policy-makers should operate at arm’s length from the exchequer is out. Fiscal and monetary authorities (including the RBI and the FinMin) worked closely together through the crisis and often the key interest rate and liquidity decisions seemed to have driven by the fiscal rather than monetary bosses. This is likely to continue in 2009 and will mean that if the government wants to spend more to rev up the economy, the monetary authorities will not hesitate to print money to enable this spending. Economists refer to this as ‘accommodative’ monetary policy.
Moral hazard: The idea that governments should not bail out errant banks and finance companies as this would encourage more reckless behaviour was buried under the rubble of the financial system as it imploded in October. In fact, the selective use of ‘moral hazard’—the US government letting Lehman Brothers go bust while bailing out a number of others (AIG, Freddie Mac) — caused the biggest crisis of confidence of all. As financial markets across the world froze over in the wake of the Lehman fiasco, ‘moral hazard’ beat a rather hasty retreat and was replaced soon by ‘too big too fail’ as the basis for policy decisions
Fiscal restraint: ‘Pump priming’ and ‘deficit financing’ are back with a bang and that means the idea of ‘fiscal restraint’ is on its way out. India’s fiscal deficit is likely to print at 5.4 per cent for 2008-09 compared to the budget target of 2.5 per cent. The bail-outs for all economies put together is likely to be at least about $5 trillion. This, of course, means that governments across the world will have borrowed a lot and will continue to borrow next year. This might not mean high interest rates in the near term as the additional demand for funds will enter to fill the void left by waning private sector demand for credit. The long-term consequences of growing national debt cannot be wished away. Many of us in the economist community have turned Keynesian and argue that in the absence of massive government spending, the global economy will get into a deep and prolonged recession that could be difficult to pull out of. Not everyone is convinced though. The Germans, for one, are sceptical of the efficacy of public spending and tax-cuts in boosting growth. Be that as it may, the case for sticking to fiscal targets like the FRBM will remain weak.
Inflation risks: Rising oil and other commodity prices kept central banks on their toes through the first half of 2008, aided by a slew of forecasts that predicted further increase. As financial markets crumbled in the second half, so did commodity prices suggesting (at least to some) that much of the run-up in prices was due to speculative positions of investors rather than a demand-supply imbalance. The prospect of global recession now means that deflation rather than inflation fears are the key concern for policy-makers. The European Central Bank seems to have a slightly different take on this and some of their board members continue to talk of inflation risks. Now, that’s déjà vu for you.
The author is chief economist, HDFC Bank. The views here are personal
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