Return of double-dip fears

Jackson Hole conference shows US still not out of the hole

We have come a long way from the “Great Panic of 2008”, but there’s a long road ahead to robust growth, confident consumer spending and lower unemployment. That was the essence of US Federal Reserve Chairman Ben Bernanke’s speech at this year’s Jackson Hole conference last week. It was a rather subdued Mr Bernanke who sought to reassure his audience, by all accounts. Confessing candidly that “central bankers alone cannot solve the world’s problems”, Mr Bernanke exuded guarded optimism about the sustainability of the on-going recovery in the US economy. He conceded that the recovery “appears somewhat less vigorous than we expected”, and did not rule out the possibility of deflationary tendencies reasserting themselves. The thrust of Mr Bernanke’s statement, which his critics have attacked as “Nero fiddling while Rome is burning”, was to suggest that the good news from the US economy was not good enough. Based on the latest national income growth data for the US, released last week, US authorities have revised downward the annual estimated rate of growth from the more optimistic initial number of 2.4 per cent to a significantly lower 1.6 per cent in the quarter ending June 2010. Export growth is near zero, unemployment levels are high and consumer spending is still weak. “The prospect of high unemployment for a long period of time,” said Mr Bernanke, “remains a central concern of policy.”

Mr Bernanke’s prognosis suggests that the spectre of double-dip recession continues to haunt US policy-makers. It is now clear that the economic slowdown the US faces is more structural than cyclical. This means there are limits to monetary policy, a fact that Mr Bernanke openly confessed even as he assured his audience that the US Federal Open Market Committee (FOMC) would be open to using all the weapons in its monetary policy arsenal to stimulate growth, prevent deflation and ensure price stability. Ending his speech, Mr Bernanke said, rather chillingly, “Although what I have just described is, I believe, the most plausible outcome, macroeconomic projections are inherently uncertain, and the economy remains vulnerable to unexpected developments.” That is more than a sobering thought. Are Mr Bernanke and his Jackson Hole companions being more cautious than necessary or more optimistic than warranted? Perhaps the Jackson Hole audience was trying to make up for past hubris or is afflicted by the paranoia of failed magicians. The problem for the US is that while monetary policy is unlikely to make much of a difference, there isn’t much room for fiscal policy either, though the Barack Obama administration has done more than most developed country governments to use fiscal policy to stimulate demand. The US needs a boost of confidence in itself and investment in its capabilities.

For Indian business, the takeaway from the Bernanke speech is twofold: one, given continuing concern with high unemployment at home, the US is unlikely to be any more accommodative on external trade policy. Shocks like the action on H1B visas will keep coming; two, India has the opportunity to help the US by being more open to commerce, if the US eases up on high technology export controls. Opening the door to import of US nuclear power equipment and defence supplies would be a good idea at this time, and will cheer the politically down President Obama. Can India be the US’ friend in need? India’s parliamentarians have not yet shown the capacity for such strategic thinking and the diplomacy of give and take.