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he US economy’s 3.5 per cent growth in the third quarter (July-September), after four consecutive quarters of contraction, has given a psychological boost to the world, though it is doubtful if the recovery is sustainable. Major economies like Germany and Japan had already turned the corner, but the performance of the world’s largest economy is crucial for the world’s financial health. The rebound has been largely on the strength of the over one trillion dollar stimulus package the US government unveiled and therefore the rebound has even been called a government domestic product growth. Disaggregated figures of the growth number would support this view. Much of the GDP growth was accounted for by the rise in consumer demand, mainly in car and home sales. The demand in these sectors was boosted by two government schemes which financed the consumers. As they are for a limited period, their impact will soon wear off. Car sales have actually fallen after the scheme was discontinued in August.
The US government is unable to pump in more money into the economy. Unemployment rates are still high. Trade deficit has soared, savings rate is near zero and the dollar might soon start weakening. After the Great Depression the US economy grew for a while to relapse into recession. All these are grounds for caution but the rebound has created optimism. The bounce has come about much earlier than expected. Confidence has risen but the challenge is to ensure the economy can grow on fundamentals, independent of government support.
The turnaround is important for India. Though India managed to sustain a decent 6 per cent growth even in the difficult period, the economy was badly affected by the slump in the US. The software and textiles sectors were the worst hit but they are expecting better days. Since about a third of India’s GDP is accounted for by trade, the health of the global economy is an important factor in its growth. Sustained US growth is expected to help Asian economies more now, as the experience of dealing with the downturn has provided them with more safeguards and the ability for a stronger bounce. That has made the wait for US recovery loaded with greater expectations.