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A double dip to come?

Weak numbers coming out of America have spooked those who worry about a double dip recession. To make things worse, they have the laws of probability on their side, as in five of the past seven recessions in the US, the economy dipped more than once. As a matter of fact in two recessions it actually dipped thrice. The worriers continue to believe that a double dip will happen.

Ultimately economic growth or decline closely mirrors inventory build-ups or reductions. When demand drops or money becomes scarce or expensive (and CFOs scramble for cash), manufacturers reduce inventories. Business priorities shift towards cost management and working capital is scaled back. Output falls and the industrial economy begins to falter. This de-stocking clearly added to the economic woes of 2009 and deepened the recession. But when the tide turns, the upswing in inventory boosts recovery just as rapidly. This is precisely what subsequently happened in the United States. Production exceeded sales and companies filled their warehouses with products in anticipation of coming demand. Work-in-progress and working capital levels jumped. However, this recovery now appears less robust as various indices point to a conspicuous drop. A monthly survey of purchasing managers in the US suggests that the economy is losing steam. Other figures too imply that US consumer demand is slackening. This would lead us to suspect that the scores for 2H may be worse than those for the past quarters.

Recovery in America took place on the back of fiscal and monetary sops. Tax breaks provided by the US Treasury helped in the sale of homes as did the cash-for-clunkers in the sale of new cars. Both seemed to have lost fizz. US Consumer confidence has fallen to levels seen only in the previous year and this may well provide a heads-up of what is likely to happen. Exporting companies should prepare for a moderation in growth over coming quarters.

On a broader perspective, fear seems to be ping-ponging across the Atlantic. A few months ago Europe appeared to be in the midst of chaos with expected defaults on sovereign debt by some countries within the euro-zone. Many analysts were anxious about the very survival of the euro as a currency unit. Whilst all of those problems have not gone away, at least for now a rescue package, however questionable, is in place. This provides short term comfort to investors and the markets can exhale a sigh of relief. Moreover, figures from Germany are strong and the euro appears to have stabilised from the severe bear-hammering it received in the past weeks. The US dollar has on the other hand come under stress because of worries that envelop the future of the US economy.

In Asia, the problems are different. Strong growth in demand has resulted in inflation concerns and central banks are finding it hard to balance the needs of economic recovery (which some suspect still remains fragile in a few countries) with fears of price instability. Wages have been rising, fuelling a greater demand for products and consequently a rise in their prices. The fear is some Asian businesses will face rising costs which if uncontrolled will chip away at their competitive edge. China and India are expected to record strong figures this year with GDP expanding at 9.8% and 8.2% respectively. Oddly, the IMF in its recent report believes that growth in these economies will be even higher. Other East Asian economies too have made notable recoveries over the previous year with growth in the 6.0 – 6.5% range. Singapore’s performance has been remarkable with an extremely well managed stimulus package. Its economy is likely to grow at 14% during 2010.

In July, the IMF lifted its earlier forecast for global growth in 2101 to 4.6% from 4.2% in its April release of the World Economic Outlook. The 2011 forecast remains at 4.3%. That said, the IMF admits that downside risks to the global scenario have risen sharply since April and sovereign default fears in Europe have spread and financial markets have retreated. Under the downside scenario, global growth in 2011 is just under 2.8%. It’s hard to say for sure which way things will unfold in the months ahead.


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