The only bit of cheer for the US economy in recent days came from the quarterly results of Goldman Sachs, which recorded a handsome profit of $3.4 billion largely on the back of impressive earnings from trading and stock underwriting. In the real economy, however, things continue to look bleak as unemployment closes in on the 10% mark, a level that most analysts, including the Fed, were predicting in any case. Still, there are indicators that things may be close to bottoming out and that the worst is over for the financial sector. The real sector will recover with a lag. The crisis was so deep in the US that even with interest rates close to zero and a huge fiscal stimulus of nearly $800 billion, recovery is taking its time.
Contrast this mixed picture in the US with the apparently good news coming out of China?-the $3.2 trillion economy recorded an impressive growth rate of 7.9% for the April-June quarter, improving substantially on its 6.1% growth in the January-March quarter. Analysts are rushing to credit a very effective fiscal stimulus plan worth $586 billion and a liberal monetary policy which has resulted in $1.1 trillion of new credit being disbursed in the economy. However, these figures need some qualification. China?s real problem lies in the export sector?-and that problem has not showed any signs of easing up significantly. Exports have fallen for six successive months now. To the extent that the domestic economy wasn?t directly affected by the crisis (much like India?s) the fiscal and monetary stimuli have no doubt worked to boost domestic demand. However, analysts have expressed doubts about the quality of lending that has taken place in the credit disbursement spree. A lot of the money has gone into real estate which could simply end up fuelling an asset price bubble. Also, the proportion of bad loans in an already suspect banking system may rise as a result of reckless lending. China?s government is, of course, getting closer to achieving their 8% target?the level at which they believe they can deliver sufficient employment and well-being to avoid any significant political unrest. But in the singular obsession with that number, they may be unleashing counter-productive forces of inflation and bad loans. China?s real recovery will begin when exports begin to recover?that may however take a while.
