Global Economic Recovery - Are We There Yet?

Analysts are now revising upward their growth estimates, suggesting that the contraction of growth will be slightly less severe than was expected in February and March. However, they remain divided about whether the recovery will begin in the latter half of 2009 or be delayed until 2010. Consensus now suggests that the U.S. economy might bottom in H2 2009 and that Chinese acceleration in H2 2009 could be more pronounced. The outlook remains weak for Europe and Japan. However growth may be well below potential in 2010.

• IMF (July): The global economy is beginning to emerge from the recession "but stabilization is uneven and the recovery is expected to be sluggish." Economic growth may be 0.5 percentage points higher than projected in April 2009 or a 1.4% contraction in 2009 and 2.5% growth in 2010. Advanced economies will contract by 3.8% in 2009 - the U.S. by 2.4% (slightly less than in April), eurozone by 4.8%, Japan by 6%, UK by 4.3%, Canada by 2.3%. Eurozone will continue to contract in 2010 (0.3) while U.S. (0.6%) Canada (1.4), Japan (1.7%) and UK (0.2%) have below potential growth
• IMF: Emerging markets will slow sharply, growing by only 1.5% in 2009 before rebounding to 4.7% in 2010 (lower than the 6% in 2008). China to grow 7.5% in 2009 (8.5% in 2010) India 5.4% (6.5%). Asean to contract by 0.3% in 2009 before growing 3.7%) Latin America (-2.6), Eastern Europe (-5) and CIS (-5.8) to all face contractions in 2009 and sluggish growth in 2010 while the Middle east grows only 2%
• OECD (June): now expects a 4.1% contraction in the OECD area for 2009 (from the 4.3% expected in March) followed by a 0.7% growth in 2010. Thanks to a strong economic policy effort, OECD activity now looks to be approaching its nadir but the ensuing recovery is likely to be both weak and fragile. Recovery will take hold in a staggered manner across countries, reflecting differential policy stimulus and the force of headwinds from balance sheet vulnerabilities. A recovery appears to be in motion in most large non-OECD countries. The U.S. may bottom in H2 2009 and show marginally positive growth (as will Japan). Signs of impending recovery in the euro area are not yet as clearly visible and recovery may be sluggish.
• World Bank (June): Global GDP, after falling by a record 2.9% in 2009, is expected to recover by a modest 2.0% 2010 and by 3.2% in 2011 as banking sector consolidation, continuing negative wealth effects, elevated unemployment rates, and risk aversion are expected to weigh on demand throughout the forecast period. Despite higher growth rates in developing countries (given stronger underlying productivity and population growth), output will remain subdued. Given output losses to date—and because GDP will reach its potential growth rate only by 2011—the output gap (the gap between actual GDP and its potential), unemployment, and disinflationary pressures are projected to build over 2009 to 2011.
• UN (May): The world economy (World Global Product) is expected to shrink by 2.6% in 2009 after a nearly 4% annual increase in 2004-2007. Despite an expected recovery (1.2% growth) in 2010, risks are on the downside in 2010. World income per capita is expected to decline by 3.7% in 2009. In a more optimistic scenario, in which the financial and credit markets are healed in 2009, world GDP could rise 2.3% in 2010.
• In April's World Economic Outlook, the IMF forecasts that real global economic activity will contract by 1.3% in 2009 (1.8ppts lower than January's 0.5% growth prediction and 3ppts lower than in November 2008) before staging a modest recovery in 2010. In June (Reuters) it reportedly raised its forecast, suggesting global growth of 2.4% (up from 1.9% in 2010).
• Citigroup: Recessions — in terms of declining GDP — are ending, or soon should, in many countries, and our growth forecasts have edged up in recent months in many regions. with low inflation, most major countries can afford to keep low interest rates and extensive unconventional stimulus in place for an extended period with the RBA being among the first to hike rates. Global growth is likely to contract by 2% in 2009 before increasing by 2.9% in 2010 (based on PPP weights)
• Signs of stabilization―though scattered and sometimes contradictory―have begun to emerge. However, it is still too early to say that a sustained recovery is imminent. Global industrial production is currently down about 13% over last year, and while it may rise in the coming months due to inventory correction, the future remains murky. GDP forecasts for 2009 are still being marked down to reflect a weaker-than-expected start to the year.
• BNP: A deeper and sharper inventory reduction, stabilization of financial confidence and policy actions may have helped bring about green shoots earlier than expected, but they may be transitory given that the countries that have had a mercantilist growth strategy have not sufficiently stimulated domestic demand to offset the hurt from falling exports.
• RGE Monitor (April): Global economic activity is expected to contract by 1.9% in 2009. Advanced economies are expected to contract 4% in 2009. Japan and the eurozone will suffer the sharpest downturns. U.S. GDP will continue to contract, albeit at a slower pace throughout 2009, with negative growth in every quarter. Emerging markets will slow down sharply from the stellar growth rates of the past few years, with the BRIC economies growing less than half their 2008 pace of 7.5%.
• Morgan Stanley: Massive global policy action has moved us further away from a Great Depression-type scenario, and the risks of contracting output and structural deflation have waned. Global output will probably start growing in 3Q09, with G10 output growth turning positive in 4Q. Growth for 2009 as a whole will stay firmly in negative territory for all regions except Asia excluding Japan (AXJ) (where China and India will keep growth in positive territory).
• The global economy remains weak across the board, with no significant signs of improvement. Moreover, growth in 2010 is not a foregone conclusion.
• Goldman: Growth in the emerging world may likely keep the global economy from contracting in 2009, but risks are tilted to the downside. The global economy may expand by about 1% y/y in 2009, down from about 3.2% in 2008. Most of that growth will come from Brazil, Russia, India and China as domestic demand growth will offset declining exports. China alone may contribute more than 60% to global growth in 2009
• Citi: The nadir for growth in most regions remains late this year with 1.7% global growth expected, with shallow recoveries expected in 2010. The deepening global recession is creating greater challenges to policy making. Markets will face more challenges to growth after the recession due to a rise in the cost of financial inter-mediation and the potential to draw the wrong lessons from the crisis.
• The global financial crisis is bringing an end to the vendor financing model, whereby excess consumption in the US was financed by a savings glut in the emerging world. The market will ensure this adjustment finally happens.

p/s photos: Michelle Yip Shuen

Beijing's BYO To The Party

Beijing has unveiled a 4 trillion yuan (HK$4.54 trillion / US$582bn) economic stimulus package to help boost domestic demand - in what is seen as a shift to "proactive" fiscal and "moderately easing" monetary policies.

The measures, which run until the end of 2010, were announced after a meeting of the State Council chaired by Premier Wen Jiabao, Xinhua News Agency reported. Some 100 billion yuan (US$12.8bn) is earmarked for this quarter alone.

The spending will focus on 10 areas, including low-cost housing, infrastructure in rural areas, and social welfare, in addition to transport networks - railways, highways and airports - environmental protection and technical innovation.

It also includes capital expenditure to renew city power grids. Some of the spending overlaps longer-term stimulus plans reported earlier - including a 2 trillion yuan railway plan and 5 trillion yuan expenditure on roads, waterways and ports from 2006 to 2020.

BNP Paribas chief economist Chen Xingdong said: "This is the first time China has officially confirmed the shift to easing monetary and fiscal policies. Although it was a 'slow heating up process,' it shows the government's realization of the urgency to bolster economic growth." Economists have been anxiously waiting for a huge stimulus plan ever since gross domestic product growth slowed to 9 percent in the third quarter from 10.4 percent in the first half.

"At the Central Economic Work Conference, to be held later this month, Chinese leaders are expected to announce concrete measures to stimulate the economy ... Beijing's new policy drive of upgrading infrastructure, rural land reforms, and expansion of social welfare is akin to a 'New Deal' with Chinese characteristics," said Jing Ulrich, chairman of China equities at JPMorgan. China's economy grew at the slowest pace in five years in the three months through September as export orders shrank amid the global financial turmoil. Domestic industrial production also fell after Beijing ordered heavily polluting factories to shut down ahead of the Olympic Games in August.

The Cabinet also confirmed that reform of the value-added tax system will cut companies' tax bills by 120 billion yuan. Beijing will also remove credit limits of commercial banks to further encourage lending support to small and medium-sized enterprises. The People's Bank of China has cut interest rates three times since mid- September. People's Bank of China governor Zhou Xiaochuan, meanwhile, said the central bank forecasts the mainland economy to expand between 8 and 9 percent next year.

The success of this plan depends crucially on continued government credibility in the face of rapidly rising deficits as well as on the health and stability of the banking system.If the banking system can withstand a downturn without any significant rise in NPLs and without forced credit contraction, this may be the shot in the arm China and the world needs. This move by China is a very big hint of how worried the government is and how determined they are to address the issue that this plan was approved.

The government can force credit expansion by requiring the banks to lend more.

Certainly they are trying. Last week, after weeks of rumors that loan caps were being relaxed, the PBoC announced that they were junking the credit restrictions they had previously imposed on banks. But loan growth has still been very low.

This is hardly surprising. In such dire economic circumstances with global credit markets and liquidity seizing up, with domestic bankruptcies rising, with inventories and receivables also rising, it takes both brave banks and brave borrowers to accommodate credit expansion. Most good companies seem reluctant to borrow and anyway banks are reluctant to lend.

So what if policy-makers simply announce minimum loan growth targets for every bank? That should certainly cause an expansion in banks’ balance sheets. However, this will create some problems. It might not be effective in net credit creation for the country. If banks don’t want to lend but are forced to, we will see off-balance sheet transactions placed back on balance sheet and a much more rapid decline in loans from informal banks. That means that real credit expansion can still be negative even with minimum loan growth target enforced onto the banking system. Forced lending will also result in a sharp deterioration in quality of borrowers. It is always possible to find borrowers, even in a sharp economic contraction or investment crisis.

US$582bn is not a small sum, even if you spread it out over a few years. There is the multiplier effect or trickle down effects. The rule of thumb is that every one dollar spent is worth between 4-8 dollars in the real economy, velocity of money supply.

The sum announced by China is certainly very big. Is it big enough? The US GDP is about US$14 trillion or 3.5x China's GDP of US$4 trillion. Say US loses 2% of its GDP, to make it up, China would have to grow by a staggering 6.8% - of course, that's assuming the problem is just contained in the US, and that China is the only engine of growth left in the world. The other factor to bear in mind is that Chinese consumer only make up some 35% of China's GDP, much lower than US consumers. Final conclusion - its not a Prozac, but its better than nothing, a lot also depends on whether its for "show and tell" or will the measures be implemented assiduously.

p/s photos: Sammi Cheng