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Europe on recovery path - Views on News from Equitymaster
 
 
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  • Aug 14, 2009

    Europe on recovery path

    The global financial crisis which began in 2007 with the collapse of the US housing market and worsened post the demise of Lehman Brothers seems to be coming to an end in Europe if one were to go by the quarterly performance of France and Germany. France, after contracting 1.3% in the first quarter of the year, reported a marginal growth of 0.3% during the second quarter while Germany also grew by 0.3% after plunging 3.5% in the first quarter. The Euro region as a whole was not that lucky as GDP slid by 0.1%. Having said that, the decline was hardly something to be worried about and was in fact a marked improvement from the first quarter wherein GDP had contracted by 2.5%. Does this mean that recession in Europe is coming to an end? It seems so at least in France and Germany. However, even if the other European economies have contracted, the pace of the same is lower than in the past and definitely signals that the worst of the recession is over. Some like Britain, which has been badly damaged by the crisis, is not likely to witness a recovery before early next year.

    The US Fed has also emitted positive vibes on the US economy in more than a year and probably suggests that a recovery may have started. However, it needs to take a critical decision on when the stimulus measures that were undertaken to revive the economy need to be withdrawn. India, for its part, has seemingly put the worst impact of the crisis behind it, but has other more pressing concerns to address now. None more pressing than the deficient monsoons and the havoc that it is likely to create on the country's GDP growth this year. The Finance Minister Pranab Mukherjee seems confident of India's GDP growing by 6% plus and has talked of having a contingency plan in place to tackle a drought. While this does seem a bit doubtful, it goes without saying that the government certainly has a challenging task on its hands. We hope that the government pulls a rabbit out of a hat and pulls India from the brink of a further slump in growth.

    Some respite for airlines?
    The airline companies in India are a harried lot. Two issues that have put the industry in such a perilous state are the exorbitant taxes on aviation fuel and significant overcapacity. On the first issue there could be some respite for the beleaguered sector. As reported in a leading business daily, a group of ministers (GoM) would be set up soon to study the impact of high jet fuel prices on the aviation industry and recommend measures to bring down its burden on the operational costs of the airlines. At present, ATF accounts for over 40% of the total operational cost of an airline in India, compared with 20-25% globally. So, efforts by the government to bring this down will certainly be a welcome relief to the sector. But will it solve its problems entirely? Not really because the second problem of overcapacity is equally responsible in undermining the revenues and profits of airline companies.

    As the Economist reports, in a bid to enhance market share not only did the airlines price the tickets well below the cost but also bought twice as many aeroplanes as the market could support. The magazine further reports that as competition intensified so did the poaching of pilots and mechanics as a result of which employee costs soared. Even if there is some relief on the ATF front, it is obvious that domestic airline companies will have to focus on pruning capacity and implement cost effective measures to become leaner and stronger.

     

     

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