Is the recent recovery in the global economy sustainable?

The developed economies like the US, Canada, Japan, Germany, France, S. Korea all have managed to pull out of the so called worst recession in seven decades and have posted quite impressive GDP numbers in last two-three quarters. The two countries which are leading the world economic growth namely China and India have also clocked stellar GDP growths in recent quarters. In addition to that, the US labour market has also shown signs of improvement in last two-three months. Data prints from the US housing market have been quite an icing on the cake in the recent months.

But as we all know that much of it is the outcome of extremely easy monetary policy and gigantic fiscal stimuli launched around the world in last one year and a half. Now the key question at this juncture is that once the policy makers start a gradual exit from the monetary and fiscal stimuli, will the growth momentum sustain? Or the global economy will fall flat once the monetary and fiscal support inevitably withdrawn. And the on-going Europe debt-crisis adds further to the uncertainty to the outlook of the global economy.

Government contribution made all the difference: Government spending has been the key factor behind the strong GDP growth witnessed by major economies in the world. Given the fact that fiscal deficit has increased sharply in most economies in the world, the government support to the economy can not sustain for long. And ultimately the governments will have to withdraw their support which is expected to start in 2010. I, therefore, don’t expect 2010 to be a year of robust economic growth. In fact, according to me India’s GDP growth for FY11 is likely to remain lower than that of FY10. Nevertheless, I expect the macro fundamentals of Indian economy to improve significantly in FY11.

Now talking about the sustainability of the growth momentum, the probability of a double dip recession is very low at this juncture. But the global economy is going to take a while to reach the normalcy level and the global economic recovery process is likely to be rather gradual.