It's been 2 years since Lehman

Tue, 14 Sep Pre-Open

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Come October and it will be 2 years since the Lehman bust. The crippling effect it has had on the global economy has already been etched in the annals of history. Indeed, a lot of happened since then and there has been a perceptible shift in the functioning of the global economy. In this article, we shall take a look at some of the events that have dominated headlines since then.

Stimulus has been a damp squib: For starters, the various stimulus packages announced by governments in the US and Europe have not done much to pull their respective economies out of the slump. True, there was a short term respite as growth picked up a tad bit. But this was largely attributed to the inventory depleting and not due to any fundamental change having taken place. Meanwhile, the unemployment in the US has stubbornly refused to budge. As a result, all the measures to spur consumption have hit a blank wall as the average American consumer is wary of spending. And to rub salt onto the wound, the mortgage market where the problems began in the first place, have not displayed signs of taking off.

Debt has bloated: What these stimulus measures have done, however, is to deepen an already deteriorating debt situation. This began in Dubai when the government was in the danger of defaulting on its sovereign debt. This thread was then picked up in Greece, which was in the danger of going bankrupt. This chain of events laid bare the fact that many European governments were severely indebted. This in turn put immense pressure on the Euro and its ability to pull thorough the crisis. The jury is still out on that one. But as a result, most of the European governments are advocating austerity measures at a time when recovery is not really taking place. This has thereby raised concerns of any prospects of growth being thwarted and consequently prolonged recession.

China's rising clout: Meanwhile, the balance of power has slowly been shifting to the East. China has made increasing strides in this regard. Its economy, along with India's, has been growing at a much faster pace. China has toppled Japan to become the second largest economy in the world. Besides consuming raw materials at a furious pace, the country has also been making investments in the developing economies. It is also the largest holder of US Treasuries and has displayed concerns about the status of the US dollar as the world's reserve currency. Having said that, China also has problems of its own to contend with. One is that despite trying to focus more on domestic consumption, exports still form a larger chunk of overall revenues. And this is not likely to pick up much, unless the US and Europe recover. Moreover, a large part of the stimulus measures has found its way into the property market, which is beginning to look like a bubble.

Emerging stockmarkets are rising: Meanwhile, due to a prolonged recession in the West, foreign investors are exploring other avenues to generate stronger returns. In this, the emerging markets are managing to whet their appetite. The caveat to stockmarkets like India is that valuations have already run up considerably. For instance, although the growth story of India looks intact, this already seems to have been amply reflected in the current prices. Looking ahead…

Economists, governments and central banks the world over are scratching their heads trying to find a way of tackling this recession. Given the scale and intensity of the crisis, the solution indeed is not going to be easy.