Lack Of Control Over Pandemic Spread Threatens Rebound In Global Growth…

The US economy is going to benefit from the fiscal spending that the government has already initiated, and more is expected from the new dispensation which assumed power last month. The tough line against China, Russia and Iran is going to be in place but the approach to the specific issues may be different from that of the earlier regimes. The additional and probably larger fiscal incentives may help the US, which is facing lack of improvements on the job front, as also no perceptible rise in consumer spending. These two factors are likely to be a drag on the rate of economic growth too, while on the other side the likelihood of inflation setting in is being viewed as an almost a certainty. The central problem is not growth or spending but the fact that the pandemic is still raging and it defies any solution at this juncture but has affected mobility and economic activity in many parts of the US, which are at the core of any growing economy. The initial exuberance based on vaccinations have come down, and the question that is asked is as to when complete normalcy will be restored. The US ten year treasury yield has moved up all the way from 0.50 %, and currently it has touched 1.15 % mark. Even by conservative estimates, the ten year benchmark yield is likely touch somewhere close to 1.40 % to 1.60 % during the course of the next two quarters. The conditions in Europe and UK are also not far too better than this. The whole of Europe is in the grip of the pandemic, and it is becoming more complex with new strains of the infection making its appearance, and the efficacy of the vaccine against the new strains itself is being questioned. The UK appears to be hit the worst among the European countries. These developments have been accompanied by selective or general lockdowns and which have had its immediate impact on general economic activity. This is going to dampen the economic growth rates in the coming quarters. There is nothing afresh that is coming from the ECB as of now as they have halted any further cuts in the base rate, though there is some room for another cut. But interestingly, there is no further spending plans too from the ECB or the local governments. The overall economic performance should be understood against the background of these realities. The only islands of relative stability are India and China, and while growth has emerged in these two territories, sustaining the growth would be a more arduous task at hand. The threat of inflation due to higher commodity prices and a rise in crude oil prices do not really help both these economies which have probably the largest bills for oil imports. China has stable currency, exposed to the headwinds of trade, whereas the challenges for the Rupee may come from the direction of investment flows from abroad. There is no finality on many issues unless the pandemic is controlled completely and the world goes back to work on a normal day.

 

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