The signs of revival have been strong for a while — unemployment is at an eight-year low; consumer prices have increased seven months in a row, the fastest in eight years; business confidence is higher as the Tankan sentiment indicators testify; and GDP growth rates have stayed above 3.5% in the last two quarters.

It is only the context in which this much delayed revival of Japan is happening that causes concern. There is a heightened sense of anxiety in the world today, with fears of inflation, slower growth and increased market volatility occupying centre stage. Japan’s revival does not create a sense of relief and balance but underscores what seems to be an exaggerated level of global economic dependence.

There is a certain obsession with inflation that Central Bankers have exhibited in the recent past. The persistence of the US Fed to raise rates beyond the much expected 5%, and the quick rate hikes sent out by the European Central Bank, have happened on the premise of controlling inflationary tendencies in an expanding economy. Back home as well, Dr. Reddy never fails to remind us how inflationary tendencies require pre-emptive strategies. It would then seem that Central bankers are supporting a well-orchestrated shift from recession to growth, keeping inflation in check all the while, by increasing rates gradually.

There are two dangers in this generalization. First, growth of the kind that requires hawkish central bank tightening may not be happening. The employment, consumption and earning numbers that have been coming from US and Europe do not support a clear revival in growth yet. Japan’s rate increase has come with the clear indication that the pace of further hikes will be slow, depending on growth numbers. The lessons of 1991 are too hard to forget. Second, global influences on inflation as well as growth are much higher today, so that demand side machinations of Central bankers may not address the problem entirely.

The global story today has several facets. The surge in cross-border trade and movement of labour and capital have created arbitrages not fully exploited earlier, and dependencies not known earlier. The ability of emerging economies to produce goods and services at much lower costs and sell them to the world has meant that these economies can use their cost-advantages to actually bring about a global disinflation in the goods and services they offer. They are able to attract capital flows from the world by being able to offer better investment opportunities and higher gains. Their GDP growth then is fuelled by higher levels of exports to the world, and the surge in consumption for their goods and services. Therefore even as the larger economies are worried about slower growth, there are several emerging economies that have been enjoying robust and sustained growth.

At a romantic level, then, it would seem that the shift, or more equitable distribution of growth and prosperity across the world, would mean that larger economies give up their dominance of the world to the newer economies that would grow in size over time. China is already there in terms of size and influence over the world, and there is widespread expectation of India, Brazil and Russia getting there over time. At a more realistic level, is sustainable growth for one section of the world feasible even if a larger segment slows down? The answer does not seem to be a resounding yes, and that is where the risks lie.

The GDP growth of several economies has come from growth in exports. While this would mean current account surplus and strong currency, it also means a straight pass-through of risks of a slow-down in the developed world, to these economies. CitiGroup estimates that the correlation between Asian exports and US lead indicators, which was 0.15 until 1997, is up 0.81 since then, indicating a high dependency on US growth rates. Gross exports as a percentage of GDP has increased for several Asian economies since 1997, the average number moving up from 52% in 1997 to 74% last year, according to CLSA research on Asian economies. What would a slowdown in US consumption mean to China and Japan is the question to ask. The next question would be about how Central bankers would respond to possible global transmission of slowdown in demand for goods and services. The constraints to policy can only make it more difficult for them.

If the US is constrained by its size and the enormity of its deficits and inability to save, Europe is constrained by the rigidities in its product and labour markets; China is constrained by the inability of its monetary policy to contain investment and monetary expansion; and the BoJ does not enjoy political support for its monetary policy stance yet.

The comfort from taming inflation numbers — which in any case were taking care of themselves from the global disinlationary forces we just discussed — could be soon lost to geopolitical factors that threaten to take oil to $100 per barrel. Central bankers could then find themselves in a situation that demands strategies for revival in a complex, intertwined world. Which is why it is too early to celebrate either the reigning in of inflation, or revival of growth. Little wonder that markets are spooked.

(The writer is chief R&D officer, OptiMix)