Have we Turned the Corner?

Last week: The Conference Board Leading Economic Index® (LEI) for the United States turned up sharply in November and December. The LEI suggests that economic growth – a little better in late 2010 than was expected – may turn up a little more this spring. The question is whether improvement will be sufficient to make consumers finally say that not only is the recession officially over, but it no longer feels like one. To many consumers, it still felt like a recession going into this winter. The readings from the indicators might convince consumers, and business executives, that we’ve finally turned the corner.

THE SITUATION ABROAD

The global economy appears to be on sound footing but beset by problems at almost every turn. China achieved a 9.8 percent growth rate in the fourth quarter, one of the best performing economies in the world. But that much growth does nothing to slow the recent increases in energy and food prices. Moreover, with stock and bond markets generally moving up slowly, and real estate still on the mend, speculation remains centered in currency and commodity markets. One question this winter is whether energy and/or food prices will rise enough to offset wage gains and cool off global consumption. There is little evidence that this is developing now. But with strong global performances and sharp increases in prices, consumers across the globe could wind up rationalizing — paying energy and food bills by taking money from other parts of household budgets. This is but one of the many challenges in 2011.

FACT OF THE WEEK

$103 trillion.

The global economy is set to grow by about 4 percent per year over the next decade, with emerging markets growing much faster than developed economies. One of the questions raised is whether the financial markets are prepared to provide the credit necessary to achieve such a performance. Economists at the World Economic Forum calculate that the global financial system doubled the amount of credit from about $57 trillion in 2000 to about $109 trillion by 2009, despite the crises. Credit might again have to double, or increase as much as $103 trillion over this decade, if the economies of China, India, Brazil, and other emerging countries are going to fulfill a promise of spearheading 4 percent global growth. The first question of course is whether these countries are up to the challenge. The second question is whether the financial markets can accommodate the growth by providing the needed credit. It’s a very tall order.

QUESTION OF THE WEEK

Is the lack of investment in infrastructure holding back development in India? Is this beginning to change?

India has the talent and resources to be a major global power. The lack of adequate physical infrastructure (roads, rails, electricity, etc.) is one major drawback. The accompanying chart shows that while the Indian population is a little smaller than the Chinese population, electrical use in India, and presumably availability, is much less than in China. And yet, India is said to have the 5th highest electrical use in the globe. Nevertheless, without major new investments in electricity generation, that gap will only widen. One of the solutions in India is to turn to renewable energy.

Coal, oil, and natural gas are the major energy sources to produce Indian electricity — now growing at about 6 percent per year. The proposed Charanka Solar Park in the state of Gujarat is expected to add about 500 megawatts to the national grid. With this and other projects, India hopes to greatly expand capacity and usage, helping to generate the power to feed its growing economy. The latest proposal is to also privatize at least some of the energy sector, in an effort to greatly increase the amount of energy and make it more available.