Financial Daily from THE HINDU group of publications
Wednesday, Dec 29, 2004
Money & Banking
Columns - Financial Scan
2004 was good, 2005 could be better
MR George W. Bush has a point. The American President was under attack from his Democratic rival, Senator John Kerry, on the large job losses in his administration in the last four years, but countered Senator Kerry by pointing out that he had to contend with adversities 9/11, the Iraq war, terrorism, corporate scandals and spiralling oil prices on a scale that made earlier presidencies seem picnics. Despite these huge negatives, the economy managed 3-4 per cent growth and net job creation; although short of expectations, it is impressive.
Score one for the resilience of not only the US, but the global economy. Events, which once struck fear and panic in governments and businesses, now hardly cause a ripple.
The tripling of energy prices barely dented growth. Another big surprise has been the behaviour of inflation amidst rising oil prices.
There has been little pass-through of expensive energy to consumer prices.
Obviously, cost management and competition have vastly changed the complexion of manufacturing and markets since the oil crises of the 1970s.
The last few weeks have seen the dollar tumble particularly against the euro. For long, there have been dire warnings on the unsustainability of the US trade deficit.
The collapse of the US currency in the last few weeks, particularly against the euro, has brought the doomsayers out of the woodwork. They predict the dollar has much further to fall.
This will reduce capital flows to the US and the foreign appetite for treasuries. As interest rates soar, consumer and business sentiments and spending will sour and the ground will be laid for a recession, which means falling Government revenues, larger deficits and still higher interest rates.
The scenario seems more than overdone. Oil prices have actually fallen considerably to $40 levels from the peak of $55. Remove energy costs and the US trade deficit would look a lot better. (Of course, there is a structural problem in the US trade balance but nothing to warrant an economic or financial market crash).
And the euro at $1.45 or $1.50 is a manageable situation and will hardly cause any distress to the US economy. On the contrary, it could spur exports and eventually attract more capital.
Even higher interest rates are not negative and could be seen as a sign of robust growth.
In fact, if the global economy could do so well in 2004, imagine how well it could perform in 2005, when political and economic tensions are clearly likely to ease significantly.
Stories in this Section
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2004, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line