Whiff of stability

In describing crises, it is appropriately said that if things aren’t getting worse, they are getting better. While much of the economic news coming in these days continues to be negative, there is a growing sense that it is not significantly worse than what was already expected. Forecasts of GDP growth during 2009 around the world, which were being frequently revised downwards for the past few months, now appear to have stabilised, reflecting the fact that expectations of negative news have been largely factored into outlooks. But, even beyond these forecasts, there are some early signs of the economic downslide beginning to bottom out. Equity markets are, of course, a dicey indicator since they can decline as rapidly as they can rise. Nevertheless, the recent rally across the globe is consistent with conventional views of how much of a leading indicator for economic activity they are. The combined impact of the various monetary and fiscal measures that have been taken over the past six months is expected to become visible in the second half of 2009, allowing for a lag of up to 12 months. Markets may well have been responding to this by re-pricing stocks of companies that are going through rough times currently but are well placed to take advantage of even a modest recovery. In the US context, housing starts have been seen as a very important leading indicator of the business cycle. Given that the current downturn is rooted partially in the housing sector, it assumes an even greater significance. Thus, the fact that housing starts increased in February was striking. It suggests that builders are anticipating a revival of demand over the next few months in response to lower prices and interest rates. It also suggests that they can avail of credit to finance their activity while waiting for sales to happen. The easing of credit is universally viewed as a critical requirement for recovery. And it is not just the US that is beginning to get mildly hopeful; the Chinese too have been talking of an upturn.

These are still only preliminary signs, though. There are enough threats looming, and these make it difficult to declare that a recovery is imminent. At the macro-economic level, there is still considerable sluggishness in the flow of credit, which dilutes the potential benefits from all the interest rate cuts and liquidity infusions that have been made over the past few months. Oil prices are relatively benign, but instability and conflict in key producing countries are never very far beneath the surface. Any flare-up could quickly result in a surge. The US financial and corporate sectors are still quite fragile and, therefore, vulnerable to any new shock. The restructuring plan for the US automobile industry may end up a non-starter, with the resultant bankruptcy proving to be disruptive for a huge network of suppliers, dealers and, ultimately, employees. In India, investor sentiment may respond negatively to the emergence of an unstable coalition. But, it is important not to overstate the negative case. Even if the hard economic data are yet to confirm the fact of stabilisation, the mood has unmistakably changed for the better. In these circumstances, psychology is as important as economics, if not more.