US recovery will take more time

Wed, 31 Mar Pre-Open

   Previous Close   

   09:30 am   

   11:30 am   

   01:30 pm   

   Closing   

All is not likely to be well with the US for some time to come. According to Charles Evans, the President of the Federal Reserve Bank of Chicago, the US jobless rate may remain higher than 9% at the end of 2010. This means that the Fed, which has already stated its intention to keep interest rates low for an extended period of time, will be all the more wary of tinkering with interest rates now. As reported on Bloomberg, the unemployment rate in the US is expected to hover around 9.25% at the end of 2010 and drop to 7% plus at the end of 2011.

The US economy lost 8.4 m jobs since the recession began in December 2007. This is the most of any downturn in the postwar era. Further, GDP shrank for five of the six quarters through June 2009. And Evans opines that the subsequent rebound has been driven mostly by a restocking of inventories. This means that the US still has a long way to go before it can boast of a sustainable recovery.

Given that the US is still in recession, the Fed is not too worried about its loose monetary policy unleashing inflation in the near term atleast. But it would be interesting to see how long the Fed will keep interest rates close to zero. After all, while inflation may not be a problem now it will haunt the US in the future. Further, the US will also have the headache of having to deal with a record deficit; the lowering of which is certainly not going to be an easy task. Indeed, challenging times lie ahead for the US government and the central bank.

FM is gunning for strong growth in India's GDP

The Finance Minister Pranab Mukherjee is keen that India goes back to doing what it did for 3 consecutive years before the crisis erupted - growing at 9% plus. After that, he has set a more ambitious goal of growing in double digits. While the intentions are in the right direction, the going may not be that easy given the various challenges that the country faces. One is obviously infrastructure and power. The other is the ability of agriculture, manufacturing and services to grow at a sustainable pace in the future. Inflation and a ballooning deficit are also serious threats to be considered.

The RBI has already displayed its ability to prevent Indian banks from sharing the same fate as that of its developed peers. But it will now see its mettle tested in terms of tackling inflation. From a long term perspective, the government will have to ensure that the social sectors are developed so that they can make a meaningful contribution to India's growth. Which is why bringing down the deficit assumes paramount importance so as to make the necessary investments in education and healthcare.