The sharp contrast between countries

Tue, 16 Feb Pre-Open

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The global financial crisis definitely put the brakes on growth in both the developed and developing world. While the developing countries of China and India did not necessarily sink into recession like the rich world, growth in these countries nevertheless slowed down. But while an economic recovery across the world seems to have started, it is happening at a different pace in different countries. At the height of the crisis, most companies with high debt on their books were the worst hit as lower sales coupled with higher interest costs and forex losses combined to hamper profits. What is more, the high amount of debt meant that spending on spurring growth also did not seem feasible.

Interestingly, at a time when the global economic recovery is said to have started, countries are now beginning to be bogged down by the threat of sovereign defaults . First, Dubai started the trigger. Now certain European countries such as Greece, Spain and Portugal are in increasing danger of doing so. This then raises a question mark on whether an economic recovery is actually taking place - in Europe atleast. US also has its own set of problems. Massive doses of liquidity may have been injected into the system. But unemployment is still very high. Property prices have still not having recovered completely. And consumers are wary of going on a spending binge anytime soon. Therefore, for the developed world atleast, the problem appears to be more of stagnating economies rather than inflationary pressures. This means that central bankers may not resort to withdrawing stimulus packages soon.

For the developing economies notably India and China it is a different ballgame altogether. There the recovery seems to be slowly taking place. This is because of the strong growth in domestic demand even if exports have still not set the pulse racing. In China, there are increasing concerns of the economy overheating what with banks resorting to indiscriminate lending and property prices soaring as a result.

Therefore, the problems confronting the developed and the developing world are different. For the developed world, recession is still a huge problem. This means that central bankers might be vary of tightening monetary policy. Especially when it is not clear if the subtle signs of recovery are for real or are propped up by stimulus measures. For India and China, the problem now is inflation. Both the countries recently raised the reserve requirements to be kept with banks. In India especially, inflation has still not displayed any signs of cooling off, consequently putting immense pressure on the RBI.

The global financial crisis has certainly been a shocker to the world at large. Will most countries regain their lost glory? Or will we witness a ‘new normal’? Only time will tell.