“Green shoots”- Natural or Artificial:

Ben Bernanke, the US Federal Reserve Chairman has said that he can see some “green shoots” in the economy i.e. some positive signs of the economy reviving and coming out of the negative growth it has witnessed since last 12 months. 

The US equity markets have rallied for the past week. The equity markets of some emerging markets such as India too have seen a rally. The month of May saw India’s benchmark index, Sensex, go northwards by almost 3000 points 

But it is largely driven by sentiment about the stability of the new government and expectations of strong and quick economic reforms. More so due to no ‘left’ pressure this time and les number of allies supporting the government.

The green shoots in the economy are good indicators but they are due to the effects of them massive fiscal and monetary stimulus that governments all over the world have injected into the economies. Thus it seems that the green shoots are Artificial rather than natural. Yes, it is an indicator of recovery but once it gains momentum, the stimuli need to be looked at and the government and central banks should exit from it. The recovery needs to sustain itself on the basis of fundamentals. 

A slow growth is much better than an artificial growth by stimulus packages. Too mush should not be read into the data of consumer confidence index in the US and numbers of industrial outputs. The effect of the meltdown is still felt on the Main Street. The Wall Street seems to be recovering. However the people responsible o move markets are few compared to those on Main Street. And as George Soros once said “Collective irrationality moves the market and the market in turn reinforces that perception” 

So we should not get carried away by the green shoots. Be prepared to take some strong and unpopular steps which would be beneficial to both, the Main and Wall Street. Short term exuberance will do more harm than good