Slowdown mars big economies

Tue, 31 May Pre-Open

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The picture is not bright for some of the biggest economies right now. Take the case of the US. Whatever recovery has been witnessed until now has largely been the result of the huge stimulus packages injected by the US Fed into the economy. With these measures set to be withdrawn in June, there are fears of US economy once again losing steam. Indeed, high unemployment rate and massive debt continues to haunt the US. This has made Americans wary of spending and hence the Fed's plan of bolstering consumption through liquidity injection has unsurprisingly not taken off. There has been a drop in commodity prices, orders for durable goods have fallen and growth in factory output has been tepid. Thus, the economic outlook in the US is still quite subdued. And the US dollar has come under intense scrutiny like never before.

Meanwhile, the European Union is also facing a crisis of sorts. With debt getting out of hand in Greece, the EU had come out with a massive bailout plan to keep the country and therefore the single currency Euro from going under. That move has hardly worked with the economic scenario in Greece worsening quite a bit. As a result, the EU will have to come out with a new plan soon to keep the crisis at bay. Or will it rather let Greece go under and in some sense force it to drop out of the Euro? One will have to wait and see.

The other biggest economy is that of China. And here, although growth has been stupendous, concerns have emanated of the Chinese economy overheating. Thus, unlike the US and Europe which are still grappling with recession, a slowdown seems to be overdue in China. This has largely been due to the rise in inflation mostly fuelled by indiscriminate lending by the country's financial sector. Most of this lending was done to the property market where prices ran way ahead of fundamentals. Since then, the Chinese government has been trying to slow the economy a bit in an effort to cool inflation. The biggest worry for the Chinese is probably how the scenario in the property market plays out. There are fears that the market here will collapse the way it did in the US and will trigger more pain for the global economy. But as the Economist points out, in China, unlike in the US, housing is a vehicle for finance and not for borrowing. That is why those who own houses in China are not neck deep in debt the way the US house owners are and hence will not face the same fate as their counterparts in the US.

Whatever be the case, China in the medium term may find it a tad bit difficult to sustain the current momentum as far as growth is concerned. And with the US and Europe still way behind when it comes to a meaningful recovery, the global economy indeed looks nowhere close to being in good shape.