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| Morning in America? | | US data suggest recovery, but politics might intervene |
| Business Standard / New Delhi Feb 10, 2012, 00:28 IST |
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In estimating the chances of a recovery for India’s economy in 2012-13, the amount of growth in the rest of the world is a major unknown variable. Europe is stuttering, and the euro zone’s problems are far from over; if Greece leaves the single currency in a disorderly manner, the effects will ripple across the world economy, and hit demand for Indian products, as well as the corporate bottomlines of increasingly global India-based companies. The question, therefore, is whether growth in the United States can recover to the degree necessary to compensate for Europe’s continuing weakness.
On the face of it, recent numbers appear encouraging. Most importantly, the US Bureau of Labour Statistics released figures this week that showed that 243,000 new jobs had been created, which are likely to prop up demand for goods and services. The unemployment rate has declined by a few percentage points, to the lowest level since the financial crisis of 2008. Yet it remains above eight per cent — worryingly high for an administration facing re-election in a country in which only one president, Ronald Reagan, has been returned to the White House when the jobless rate was above seven per cent. Even more worrying, some of the decline in the rate of unemployment can be traced to people ceasing an active search for jobs, which means the pass-through into increased consumer demand should be moderated accordingly. Even so, analysts have grown more cheerful lately. Earlier predictions of GDP growth being below two per cent this financial year are in the process of being revised upwards. These revisions are being driven by stronger-than-expected industrial activity; the manufacturing sector in the US grew for the third straight month in January. Inventories are also depleting, and a backlog of orders is estimated, which causes many to think the manufacturing recovery will be sustained. The services sector continues to be strong. The need, clearly, is to sustain this momentum in such a way that the United States can stand as a pillar of relative strength, especially in terms of consumer demand, if Europe’s economic prospects stay weak and uncertain.
All eyes, thus, are on the federal budget proposal that the Obama administration will send to the US Congress on Monday. A combative Republican-dominated Congress is more than capable of stalling a budget proposal in the manner that debt ceiling negotiations in 2011 were thrown off track by politicking. If Barack Obama sticks to his guns, by outlining proposals to reduce the deficit by allowing previously legislated tax cuts on high-end incomes to expire, the political battle that will inevitably follow might well spike any recovery before it even begins.
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