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Global economy is recovering, but...

Dec 29, 2009

For all the darkness that was cast in 2008 by arguably the worst financial crisis in the world, 2009 emerged as a much stronger year. While the economic performance of countries was still not much to talk about, what really stood out was the rally in global stockmarkets. In this article, we shall take a look at what shaped 2009 and the challenges that the global economy still has to deal with.

The credit crisis and its consequences
While the credit crisis began to make its presence felt in 2007 itself, what really sent the global markets into a tailspin was the unprecedented collapse of the then revered investment bank Lehman Brothers. What happened after that is now etched firmly in the annals of history. Credit froze, liquidity dried up, home prices collapsed, banks started reporting huge losses all of which had an impact on other businesses as well. Thus, countries and particularly developed ones at that sank into recession. Stockmarkets all across the world plunged. The emerging nations were not spared either and while the growth that they posted was much higher than the rich nations, it was nevertheless lesser than what the former had recorded before the crisis erupted. Thus, 2008 was easily a dark period for countries and corporates alike as debt ballooned and cash reduced. Stimulus packages were announced by the dozen by various governments and these have yet to be withdrawn lest the recovery process gets foiled.

The spectacular rally in 2009
While 2009 began on a subdued note, the spectacular surge in the stockmarkets across the world especially in the emerging nations has dominated headlines since then. The reason for the same has been optimism that the global economy is on the recovery path. Not just that, in India particularly, the quarterly results published by corporates painted an improved picture. However, what has emerged starkly is that while profits have jumped due to cost cutting initiatives and lower commodity prices, sales growth has not been much to talk about raising concerns that the business environment has not improved. The developed nations of the US and Europe also cannot say with certainty that the recovery is sustainable although there has been some improvement in their economic performance in the last few quarters.

As far as the stockmarkets are concerned, these have rallied significantly. And if one looks at the stockmarkets of the BRIC nations, the rise has been nothing short of impressive. With the developed countries still grappling with recession, investors turned the limelight on emerging stockmarkets as they are expected to grow at a much faster rate than their developed peers. However, valuations in these markets have already started to look frothy with stock prices having run ahead of fundamentals.

Some concerns exist
While the recovery process has started the same is expected to be painful as there are many challenges that the governments have to deal with. In the US for instance, unemployment and a ballooning fiscal deficit have become serious issues. Mounting debt problems are also plaguing economies as the Dubai fiasco has shown. While the stimulus packages announced in most of the economies are propping up performance, the surge in the deficit as a result of these measures will pose a strong challenge to the governments in terms of bringing it down in the future. In India particularly, the prospect of rising inflation looms large due to poor monsoons and rising foreign inflows.

Looking ahead...
Despite the challenges that have still to be overcome, the worst of the credit crisis seems to have been left behind as was apparent in 2009. What is now becoming difficult is deciding when to withdraw the stimulus packages as the signs of a sustainable recovery are yet to become evident. For the time being atleast most of the nations intend to stick to an expansionary monetary policy. While 2010 and 2011 are touted to be much better years as compared to the last two ones, the mettle of most of the governments will surely be tested especially when it comes to framing policies.

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