T N Ninan: End of the recession

Could it be that the worst global recession since the 1930s will have lasted barely a year? That is what the latest data make one hope

Could it be that the worst recession that the world has seen since the 1930s will have lasted barely a year? That is what the latest data make one hope. It was 17 months ago, on March 17, 2008, that Bear Stearns was acquired by JP Morgan Chase for 10 per cent of the value it commanded the previous week. That was the first watershed development in a housing and financial crisis that had started sweeping across the US in 2007. The low point was reached six months later, on September 15, with the collapse of Lehman Brothers. By then the major economies of the world were in severe recession, the financial system caught in a whirlpool, and the global economy in reverse gear. India did not escape, its GDP growth rate dropping from 7.8 per cent in the first half of 2008-09 to 5.8 per cent in the second half.

Now, with data coming out for the April-June quarter of 2009, Germany and France are back to the growth path, after four quarters of decline. Forecasters expect the same to be true of Japan, when data are released on Monday. China, of course, has continued to power ahead. And the United States saw its latest quarterly GDP figure drop by just 1 per cent, compared to a shrinkage of 6.4 per cent in the January-March quarter. In short, the five largest economies, accounting for exactly a half of global GDP, are signaling that the worst recession in 80 years may be over. That is the best economic news of the past two years.

The markets have been signaling this turnaround. Global commodity prices in all sub-categories (metals, non-food agriculturals, and so on) have been on a sharp upswing in the past month, reversing the downswing of the previous year. Stock indices are up too, in some cases quite sharply; the Dow Jones Industrial Average, for instance, has climbed 43 per cent from its low point in March. And though a key indicator in the form of the Baltic Freight Index continues to signal trouble in shipping, it seems safe to suggest that from now on the news should get progressively better.

That the recession could have ended so quickly is a tribute to the response of governments and central bankers around the world. But that could also be the core weakness of the recovery—its dependence on massive government spending, which translates into unsustainable fiscal deficits. With concerns that this spending will spark inflation down the road, governments and central banks will begin to close the tap at some point, and the challenge will be to manage the transition without pushing the world back into recession.

For India, the nascent recovery means that its external trade could soon cease to be the disaster story that it has been through late 2008 and the first half of 2009, with export declines of 25-30 per cent. The June industrial production figures (up smartly to show 7.8 per cent growth) suggest that the story has already changed in the domestic arena. The April-June GDP numbers, due to be out at the end of this month, will confirm whether matters have improved after the 5.8 per cent GDP growth chalked up in January-March. The big negative is of course the failure of the monsoon and the prospect of drought, while the spread of the swine flu will hit the travel, hotel, tourism and retail sectors. So the headlines over the coming months will have a fair share of negatives. Still, it would seem that the tide has indeed turned—which is a nice thought to carry into Independence Day.