A bumpy ride ahead

The global economic recovery remains fragile, but a double-dip recession is unlikely, argues Azim Premji.

The prospect of a double-dip recession is being hotly debated around the globe. It's already evoking extreme reactions of fear, caution and even paranoia. Statistics are being bandied around to support the argument that a double dip is unlikely. Historically, only one double-dip recession has happened in the last 80 years, point out the optimists. I must say even I feel it's unlikely after looking at the macroeconomic indicators, and also from the sense I get from my interactions with our clients.

From a macroeconomic viewpoint, the largest economies - the United States, Europe and Japan - today contribute over 60 per cent of global GDP. But the US and Europe paint different pictures. The US economy has seen positive growth and is expected to clock 3.3 per cent GDP growth in 2010-11. The challenge remains the steady high unemployment at 9.5 per cent. But this does not necessarily reflect a recessionary strain or the beginning of a double dip. After all, there is an increase in private payroll employment.


Global economy not out of the woods…

  • Waning impact of the fi scal stimulus globally
  • Soft demand for new and existing homes in US and Europe
  • Deceleration in inventory rebuilding by corporates in parts of the globe
  • High unemployment figures globally

... but a double-dip recession is unlikely

  • China, India and Brazil continue to log impressive growth
  • Rebound in private payroll employment
  • Strong recovery in global corporate profits
  • Surge in IT spending across sectors
The second bright spot is the strong quarterly results posted by major US corporations, which reveal that profits are back within a whisker of the all-time highs achieved before the downturn in late 2008. By some calculations, the rate of recovery of profits from their trough is the strongest since the end of the Great Depression. Nor is this trend limited to America. Other leading industrial economies, including Japan, Britain and Germany, already have their ratios of profit to GDP above their average over the past 20 years.

Factors being attributed to this seemingly contrasting statistic to unemployment are bigger profits from the developing economies, which are enjoying a strong recovery. Second, the relative abundance of labour, which shows no signs of dwindling and which has already led to the US unit labour costs falling at their fastest clip in the post-war era. Third, a renewed focus on managing existing capacity efficiently, rather than investing in revenue growth.

The outlook going forward remains weak, though, affected by the waning impact of the fiscal stimulus, deterioration in the labour force participation rate, deceleration in rebuilding of inventories and declining sales of both new and existing homes. Foreclosure crisis, tight credit and deleveraging of households will continue to depress economic growth which is counterbalanced by the positive contribution of exports to economic growth. The overall prognosis is muted, but a second blip in the US is unlikely.

As far as Europe is concerned, last month, the Economic Sentiment Indicator - which measures eurozone confidence in the economic outlook - rose to the highest in more than two years. Growth is back but it's uneven. Germany is surging, but in Greece and Spain, output is flat, growth prospects are dim and their economies need more than budget cuts to improve overall competitiveness.

The dark clouds remain highly uncertain and to a certain extent stem from a volatile environment, continued unemployment and weakness in construction. But there are signs of a stabilising influence due to growth in manufacturing and a rising producer sentiment. All of this could lead to an economic growth of 1-2 per cent, but with a lesser likelihood of a double-dip recession.

The front runners in the "two speed" world are the emerging giants - China, India and Brazil - who continue to log in impressive growth. Their relatively closed and strong policy framework has helped in avoiding the dark recession while internal consumption and the increasing trend of home companies going global has spurred investments, driven consumption and promoted exports. These economies may not make up for the depressed growth of their larger counterparts, but are likely to continue to play the stabilising role in the global economy.

Now a microperspective. In my meetings with clients and organisations across the world and across sectors, I see a general positive sentiment. Investments are back and clients are moving from cost-cutting and cash-conserving measures to driving market share gains and innovation. This is reflected in a surge in IT spending across sectors.

And IT spending historically has closely tracked GDP growth. This is also reflected in strong performance of IT companies across the world, including those from India. The situation is no different in other sectors, too. In conclusion, the global outlook remains fragile. However, there are seeds of growth across the world which leads me to believe that the ride may be bumpy, but it will lead to recovery and a long-term sustainable growth.

- The author is the Chairman of Wipro