The global powerful financial houses and banking giants needs a chemical to wash their foresight about the world economic recovery and GDP growth numbers projected by them in the last term. The International Monetary Fund (IMF) lifted China’s GDP growth forecast for 2010 to 10.5 percent from the earlier projection of 10 percent. IMF has raised its world economic growth forecast from 4 per cent to 4.5 per cent. IMF was cheered by the fact that the world economy expanded at an annualized rate of over 5 per cent in the first quarter of 2010 and that growth was stronger than expected in most countries, including the United States, Europe, Japan, Brazil, and India.
But why then the IMF needs eyewash to look clearly before declaring the growth numbers. Europe is out of the battle for the time being. China is slowing down as its export countries are not is a position for consumption of its Chinese goods. US is having more problems than its seemed before. It recovery worked well in boosting up the stock market and S&P index to touch 1000 mark. In real term s there is no economic strength in the US. Initial jobless claims jumped by 37,000 to 464,000 in the week ended July 17. Thirty-four states and territories reported an increase in claims, while 19 reported a decline. Companies announcing job reductions in July include New Brunswick, New Jersey-based Johnson & Johnson.
Even if we look into the Chart below we find that unemployment is only increasing and less indication of reduction.
Lack of jobs will restrain consumer spending, the biggest part of the economy, and lead to slower growth in the second half of the year. It will probably take a “significant amount of time” to restore the almost 8.5 million jobs lost in 2008 and 2009, Federal Reserve Chairman Ben S. Bernanke told Congress yesterday.
Moreover the number of people continuing to receive jobless benefits dropped by 223,000 in the week ended July 10 to 4.49 million. The figure does not include the number of Americans receiving extended benefits under federal programs. More funds will be deployed to cover the benefits of those US citizens for whom the benefits lapsed. The Senate yesterday approved an extension of unemployment insurance that restores aid to 2.5 million people who lost their benefits. In other words more tax payers money and more injection liquidity.
Inflow of tax payer’s funds will only flow finally to emerging markets and S&P 500. The only good news among all these is that according to the government 4,487,000 people filed continuing claims in the week ended July 10, the most recent data available. That’s down 223,000 from the preceding week’s upwardly revised 4,710,000 claims. US needs to understand that by just simply injecting the funds and buying back toxic assets will not help. What and solely the focus should be towards increasing manufacturing activities. Raising voices on yuan valuation will not help US manufacturing. Jobs need to be created and strategies and focus should be on that and not buying assets and covering up the mistakes created by US financial giants.
So we are heading for a slowdown globally and this will affect Indian browsers and sentiment. Its a very difficult to say that how well the domestic triggers will play the fight with global challenge. If we look domestically we find that the Indian stock market is bound to touch 5800-600 levels. What we need to adopt is a slow and wait and watch option. Since any hasty investments might make us weep for a longer duration unless global economy takes a upward rally. We are in the middle of the results seasons and we need to pick stock with a long term theory and not on the basis of short term hiccups. Nifty will go for some correction but what will be the depth of the correction is hard to say since domestic reasons are strong enough to support the fall. Those who are saying that India is free from any type of affect of global imbalances must understand that FIIs are in problem and industries are dependent on export. Indian GDP numbers will touch 9% only when export picks up and FIIs and FDI continue their investments in India even during the forthcoming slowdown.
Indranil Sen Gupta
Financial, Economic Writer and Research Analyst.