Global Economic Recovery : Plausible Signs

Just a year ago, it was hard to believe that a US-originated crisis would ever engulf the entire
global economy; in the same way, it is harder now to believe that it is bottoming out so early after
the worst economic crisis since the World War II.

Even for an intransigent optimist, it would have been impossible to fathom a global recovery within
just a year or two after the worst financial crisis, which originated in the US but soon hit the
economies of the world hard about a year ago. But now a sense of optimism is prevailing that the
crisis is nearing its end and that a recovery is not very far off. "World growth can turn positive by
the end of this year, and unemployment can start decreasing by the end of next year," said Olivier
Blanchard, IMF's Chief Economist. However, it will be a while before the world leaders take
corrective actions to help a battered economy recover from what he calls competing crosscurrents,
with the collapse in confidence and demand continuing to pull the economy down and government
stimulus measures and natural stabilization mechanisms pulling the economy up. "This is not the
time for complacency, and the need for strong policies, both on the macro and especially on the
financial fronts, is as acute as ever," he added.

But don't expect a uniform, an across-the-board recovery. Strangely, the US which was at the
epicenter of the crisis, is expected to recover faster, while in Europe where banking sector was
hurt more (than in the US) it could take longer than expected. "The shock originated in the US,
but Europe is paying a higher price," New York Times quoted Jean Pisani-Ferry, a former top
financial adviser to the French government who is now director of Bruegel, a research center in
Brussels, as saying. In its latest World Economic Outlook (April 2009), IMF forecasts Euro economy
to shrink by 4.2%, much ahead of US which is forecast to contract by 2.8% and the average
contraction of 3.8% for the advanced economies.

The explanation, to the puzzle of Europe's relatively slower recovery as compared to the US, lies in
the contrasting approach taken by the respective leaders of the two regions, suggest a section of
economists. Whilst, as experts say, the US has gone for more aggressive approach by launching
stimulus packages worth billions of dollars and pressurizing banks to open up their purse strings,
in comparison, Europe has largely remained conservative and hesitant.

But even amidst what critics call muted optimism, it would be too early to say that this (recovery)
is entirely due to bailouts and improved liquidity. "Past episodes of financial crisis have shown that
delays in tackling the underlying problem mean an even more protracted economic downturn and
even greater costs, both in terms of taxpayer money and economic activity," the IMF report said.

Gradual and painful

But some experts say that the crux of the issue is not when the recovery is expected to set in, but
the intensity of the growth recovery once it bottoms out—will it be a robust or weak one is turning
out to be a million dollar question. The ongoing synchronized economic slowdown has not come to
an end, however, analysts predict an early revival only next year, even as challenges remain. For
example, the fast shrinking economies of Europe, followed by Mediterranean members, pose a
major hurdle for early recovery worldwide, as the shortage of capital in European banks is
expected to outlast their American counterparts, affecting the overall revival process. Sharp snap
backs are expected in the early 2010, propelled by massive policy boost and inventory cycle,
resulting in short-term growth, however, some experts are concerned that strong bailouts may
impact the prospects in the post-revival phase. According to Robert Zoellick, President, World
Bank, the recovery would be a gradual and painful one, due to slack capacities of the industries,
thus elevating the degree of uncertainty and risk. Even with the stabilization of financial markets in
many developed economies, unemployment and underutilization of capacity continue to rise,
putting downward pressure on the global economy. The World Bank projects the global economy
to decline this year by close to 3%, with most developing economies expected to contract this year
and face increasingly bleak prospects unless the slump in their exports, remittances, and foreign
direct investment is reversed by the end of 2010. "Although growth is expected to revive during
the course of 2010, the pace of the recovery is uncertain and the poor in many developing
countries will continue to be buffeted by the aftershocks," Zoellick said ahead of the Group of Eight
Finance Ministers meeting in Italy.
Economists believe that this is the crisis of over-leverage and over-spending, and to counter it,
effective steps like aggressive monetary and fiscal easing are necessary to prevent a severe
recession, triggered by excess lending, from turning into near depression. The WEO report by IMF
suggests, "The greatest policy priority at this juncture is financial sector restructuring. Convincing
progress on this front is crucial for an economic recovery to take hold and would significantly
enhance the effectiveness of monetary and fiscal stimulus." For poor and developing regions like
South Asia, "the question South Asian policy makers must consider is how to use discretionary
fiscal measures to boost demand and protect growth, consistent with medium-term
macroeconomic stability," said Ejaz Ghani, World Bank's Economic Advisor for South Asia Region.
The problem is, he added, unlike the developed nations, in emerging economies, unfortunately,
fiscal policies tend to be pro-cyclical. "Governments are too complacent to tighten fiscal policies
during good times, which leave less room for fiscal stimulus during downturns."

Incorrect interpretation

Even while developed economies such as the US and UK and emerging economies like China are
infusing liquidity into the markets by pumping billions of dollars through stimulus packages in
order to revive their sagging economy, some economists say that some fundamental causes that
led to recession were ignored while framing policies due to incorrect interpretation of the situation
and that has resulted in a slow revival. According to Nouriel Roubini, Chairman of Roubini Global
Economics and Professor at Stern Business School, the crisis was caused by "excessive
overborrowing and overspending by households; excessive and risky borrowing and lending by
financial institutions; and excessive leverage of the corporate sector in a global economy where
housing, asset and credit bubbles got out of hand and eventually went bust". Further, imbalances
in the trade cycle due to degradation in the wealth of households and stocks followed by excessive
spending behavior by countries such as the US, UK, Australia, New Zealand and emerging
European economies triggered the crisis. Moreover, consumption pattern caused severe strain on
the economies, thus making them vulnerable. For instance, according to the official data,
consumption pattern in the US was at its all-time high, prior to the recession, as it accounted for a
whopping 65% of the nation's GDP, with household saving just accounting for 11% of their
disposable income and it further clocked 65-72% of GDP, with savings turning negative, which led
to the downfall. Further, traditional commercial banks, considered the driving force behind
economic progress, were severely hit, as more than 300 mortgage lenders got shut. Experts say
that with interest rates turning zero, brokers, money-market funds had too little role to play in this
crisis, which they call the `culmination of a systematic banking crisis' followed by the `persistent
credit crunch'. Corporates continued to register poor profitability ratios due to deflationary
pressures at the initial stages, but were hit further as sliding demand due to liquidity crisis
deteriorated the situation, leading to huge unemployment, thus paralyzing the economic cycle.

More pains

In a recent report titled, "World Economic Situation and Prospects 2009," the United Nations
forecasts a gloomy scenario ahead. "While a mild recovery in growth of World Gross Product
(WGP) is possible for 2010, a more prolonged global recession is also possible if the vicious cycle
between financial destabilization and retrenchment in the real economy cannot be sufficiently
contained and concerted global policy actions are not taken," it said. "If financial markets do not
unclog soon and if the fiscal stimuli do not gain sufficient traction, the recession would prolong in
most countries with the global economy stagnating at lower welfare levels well into 2010," the
report adds. But the bad news is for the developing economies which have rather been hit
disproportionately hard on account of flight of capital (drying of FDI and FII investments), rising
borrowing costs, collapsing world trade and commodity prices, and subsiding remittance flows,
according to the UN report. It forecasts the volume of world trade in 2009 to fall by more than
11%, the largest decline since the crisis of the 1930s.
The report also blames the execution of the stimulus packages. "At present, the stimulus is very
unbalanced. Eighty percent of the stimulus is concentrated in developed countries, while most
developing countries lack the fiscal space to provide social protection and counteract the
consequences of the crisis." On the other hand, the World Bank has warned of serious social
upheaval, despite `low intensity' recovery. "If we do no take measures, there is a risk of a serious
human and social crisis with very serious political implications", said the Bank's President, Zoellick,
while calling for practically viable policies from economies. His views are endorsed by the UN
report which forecasts unemployment scenario to worsen in 2009-10. "Initial projections of 50
million unemployed over the next two years could easily double if the situation continues to
deteriorate." It added, "Lessons from past financial crises indicate that it typically takes four to five
years for unemployment rates to return to pre-crisis levels after economic recovery has set in."

Lower spending, a concern

But the fact that Americans are now spending fewer dollars raises a concern over the prospect of a
recovery in the world's top consuming nation. In fact, analysts suggest that spending levels are
now at an all-time low since the World War II.

According to David A Rosenberg, Chief Economist and Strategist at Toronto-based money

management firm, Gluskin Sheff, "People's attitudes towards credit and home ownership are going
a fundamental shift." He expects savings rate, which recorded a 14-year high of 5.7% in April, to
surpass the record level of 14.6% set in May 1975, when the US had just emerged from a severe
recession but the average US consumer was still not sure about the economic growth. Strangely
though unemployment was and has not been the reason for the recent decline in expenditure, as
lower tax collection more than offset the unemployment factor. Nonetheless, the major impact was
felt in the durable goods segment such as furniture and vehicles, followed by non-durable
segment, the lowest since 1940. Expectedly, medical expenses topped the list. However, on the
positive side, a recent report by Royal Bank of Canada suggests that US consumer spending, the
most potent indicator of the onset of recovery, has increased after six months of decline. "This
trend will continue in the second half of 2009 because of low interest rates, firmer credit markets
and fiscal stimulus," the report said.
Yet, reviving the demand is one of the major challenges before the central banks across the globe.
For, it is not inflation but deflation that poses a threat now. According to the IMF, "Inflation fears
are a fast-receding memory, and central bankers around the world are now on the front lines in
the fight to sustain demand in the face of financial disruptions."

Glimmer of hope

Nonetheless, there is a glimmer of hope, courtesy the BRIC economies that hold the key to quick
economic recovery. China's economy would speed up in 2010 on the back of a range of essential
fiscal and monetary stimulus measures, said the Asian Development Bank in its recently released
Outlook for 2009. "China will emerge from the crisis in better shape than it was before if it can rise
to the challenge of rebalancing its economy," said Jong-Wha Lee, ADB's acting Chief Economist.
But Asia-Pacific region is confronted with the culmination of turmoil in the banking sector, followed
by high food and fuel prices and drastic climate changes, suggests a report by ESCAP (United
Nations Economic and Social Commission for Asia and the Pacific). Titled, "Economic and Social
Survey for Asia and the Pacific 2009," the report estimates that more than two-thirds of world's
1.2 billion poor live in the Asia-Pacific region, battling against rapidly sliding economic growth, and
expects that the number of poor would go up by 100 million in 2010. In an attempt to restore the
economic position to normalcy, ESCAP has initiated to promote trade and investment at the
regional and sub-regional level, however, the domestic trade accounts for only 37% revenues, that
means the chunk of the exports, i.e., 63%, caters to the developed economies such as US and UK.
Given that, it forecasts the GDP of developing economies in Asia to decline by 3.4% in the current
year, the lowest ever level since Asian financial crisis a decade ago. The report suggests that in
order to mitigate the current risk posed by the downturn, economies should alter their export-
oriented strategy within the region to accelerate domestic consumption; followed by focusing more
on infrastructure projects that would stimulate employment and boost demand for commodities
and energy, which are very much a necessity.

Nevertheless, a section of analysts believe that despite being recession-stricken, developing

economies are in a better position as compared to during the Asian financial crisis. Pro-BRICs say
that the Asian economies are set to recover much in advance than their western counterparts,
thanks to the relatively benign economic performance of China and India, thus making them a
bright spot for the global economic recovery in 2010. "Sharp export slowdowns were more likely to
be followed by quick rebounds, and the short-term outlook was not that negative," said Michael
Spencer, Managing Director, Chief Economist and Head of Global Markets Research, Asia Pacific,
Deutsche Bank. In fact, there are already some positive developments that support such optimism.
For instance, secondary markets, after a long lull, are again showing signs of revival, as investors
both domestic as well as FIIs are back with a bang, which has seen India's benchmark Sensex
zoom past 15k mark on June 9, its 9-month high. So far FIIs have invested over $4.2 bn in 2009;
in contrast, they were net sellers to the tune of a whopping $12 bn in 2008. Even on the overseas
borrowing front, things have turned for good as access to liquidity improves and corporate India is
firming up its plans to tap an important source of funding. Buoyed by this, the country's apex bank
forecasts the economy to grow in the range of 6.5-6.7% during the ongoing fiscal. In fact, the
signals emanating from the BRIC economies as a whole are quite positive. For instance, according
to billionaire investor George Soros, "Given the favorable factors in China, China is actively
cooperating with the rest of world and has its economy recovering fast." However, Yao Jian, a
Ministry of Commerce spokesman, said that China still faced an `arduous task' to stabilize its
export sector—a key engine of growth until global trade collapsed last winter, reported Reuters.

Russia, another member of the BRIC, hopes that the worst is behind. "Within the next few months
we expect more positive growth dynamics and a lower decline rate in the economy," said Arkadiy
Dvorkovich, an aide to the Russian President, on the eve of St Petersburg International Economic
Forum, which opened on June 4. Russia's President Dmitry Medvedev said that the recovery (in
Russian economy) will be quicker than expected. "I expect the Russian economy, as one of these
rapidly developing markets, to overcome its problems more quickly than had perhaps been
expected," he said at the Forum.

Brazil too expects to bounce back from the shocks of the crisis soon. The economy is expected to
grow at 1% in the current fiscal. The government is targeting 1% economic growth, an
achievement considering that much of the western world is in deep recession, Brazil's Finance
Minister Guido Mantega said. Meanwhile India's Prime Minister has expressed hope that BRIC
would be able to lead the global economy out of the woods. "The countries of BRIC together
account for 40% of the world's population and 40% of global GDP. The BRIC grouping has the
potential to lead global economic growth," the Prime Minister said.

And the news from the western nations too is encouraging. The advanced economies too are
projecting a positive picture. Hinting that the worst of the global financial crisis might be over, a
communiqué from finance ministers and central bank governors from the G8, who met at the
southern Italian town of Lecce, Italy, on June 12-13, said, "There are signs of stabilization in our
economies, including a recovery of stock markets, a decline in interest rate spreads, improved
business and consumer confidence, but the situation remains uncertain and significant risks
remain to economic and financial stability." The economies are now exploring `exit strategies' "to
unwind the huge stimulus packages that have been deployed to combat the crisis", IMF said.

Another report by the Royal Bank of Canada suggests that "the global economic crisis has
bottomed out and positive indicators have begun to emerge." According to the report, "There were
encouraging signs for global recovery as the US economy was showing signs of recovery after
worst-ever declines in its GDP in the last quarter of 2008 and the first quarter of 2009." Craig
Wright, RBC's Chief Economist, said, "There is an unprecedented amount of money bolstering the
world economy. What we will be watching is the impact this spending has on labor markets, as
well as household and business confidence." "The degree of impact will be a crucial factor in
shaping economic recovery," he noted. Though the crisis has seen the unemployment rate surge
to a record 9.4% in 25 years, the recent data suggests that this rate has started declining, the
report said.
Maintaining a cautious posture, US Treasury Secretary Timothy Geithner too has said that there
are a number of signs that conditions are getting better, including that 10 of the largest US banks
have been approved to repay $68 bn in government bailout money. But the current financial crisis
"took a long time to build up and it will take a long time to get through it," he told in an interview.

Nevertheless, "There are reasons for optimism," said John Lipsky, IMF First Managing Director.
According to him, there are signs that the unprecedented policy response, both fiscal and
monetary, as well as the support being provided to financial systems, are all starting to show
results. He felt that the turnaround would be led by the emerging economies where growth will
accelerate towards the second half of the year. But he added that while "it's too early to say we
can see the green shoots of recovery in the advanced economies. What we do hope to see, or
what we think we can see, are signs that the downturn is de-accelerating in advanced economies."
He added, "This would be a precondition for a real emergence of green shoots and a return to
positive growth next year." He emphasized that there is a strong imperative to restore financial
sector functionality in the advanced economies, a challenging task nevertheless.
To conclude, it goes without saying that a full-fledged global recovery would depend on how soon
the US recovers. So, it would be a long road ahead for the most part of the global economy, if not
entirely. But some nations, majorly from Asia such as India and China, can look forward to grow
again.

"While current policies may stimulate growth in the short-term, we

fear that it will not lead to a sustained recovery."

Can the global economy recover in mid-2010 as predicted by IMF?

Elston: It is very unclear how the global economy will perform next year.
Governments around the world are attempting to stimulate growth using
unprecedented monetary and fiscal boosting measures. At this point, there is
no evidence that this stimulus has resulted in a pick up in final private
demand. In fact, huge government spending is likely to crowd out the private
sector, making meaningful recovery less likely.

Wong: To gauge the recovery of global economy, we should be looking from

two angles that are based in technical and fundamental rationale. Generally
speaking, the global economy hit their respective bottoms in all equity
markets during the end of 2008 to early 2009. By technical studies, we have
seen some recent gains for the major markets, which are a natural rebound
after a long decline. The general theory in market movement will expect
another consolidation again on the downside, but above the previous low,
until the third quarter 2009 before the buying sentiments turn strong
sometime in 2010.

Nevertheless, the market will be vulnerable during this consolidation period. If

any further recession impact were to erupt, it will bludgeon the market to a
new low and the subsequent recovery will take a longer time. This possibility
will depend largely on the potential crisis from other industries such as
construction meltdown, continual collapse of automakers, stagflation of oil
and commodities, mutant virus outbreak and warfare. Thus, it is too early to
predict the recovery until we have moved across the threshold of market
consolidation period without the further emergence of ugly heads.

Behravesh: There are many forces that will bring about a recovery in 2010.
These include: much lower commodity prices (especially oil prices), massive
financial rescue packages (which have eased credit conditions considerably),
aggressive and unorthodox moves by central banks around the world to lower
borrowing costs, and record fiscal stimulus in some countries (especially, the
US and China).

What measures should be taken by the developed and emerging markets for
economic revival?

Elston: In our view, the best thing that governments could do is to step back
and let market forces determine supply and demand. Government
interference, in our view, only serves to distort natural economic forces and
results in suboptimal growth, as private sector demand is crowded out by
government expenditure. So while current policies may stimulate growth in
the short-term, we fear that it will not lead to a sustained recovery.

Wong: Developed markets should be working more attentively to increase the

consumer demands which usually have a stake in two-thirds of the national
growth. Besides creating more jobs, new arenas in modern technologies
should be explored in order to increase the expansion of different industrial
participations. In addition, monetary liquidity must be maintained and
gradually enlarged by the respective governments to support the business
functions of private corporations during this critical time.

Emerging markets usually have higher demands for raw materials and
commodities. Thus, foreign investments and government budgets should be
revised to kick-start more multiple national developments. Multi-tier tax
incentives will be great tools to aid in consumer spending and private
entrepreneurship for increasing competitiveness in the commercial world.
However, it is essential for all emerging markets to control their budget
deficits to be in minimal levels or even good to be in surplus. This can be
effective in passing on more stimulus measures to the economic recovery and
also to keep themselves out of debt.

Behravesh: Most countries have cut interest rates aggressively. However,

many have been less aggressive about boosting fiscal policy (Japan and many
European countries fall into this category). This is where more needs to be
done.

Will the current reforms/policies and Obama's stimulus efforts be fruitful in

reviving the ailing Japanese economy and Europe's banking sector?

Wong: Currently, the key interest rate of the US dollar is almost on a par with
the Japanese yen, thus keeping the pressure on the greenback but good to
ease the national budget deficits. In the longer-term, such a policy may
tamper with the interests of offshore investors in acquiring the treasury debt
instruments.

On the other hand, Japan has been in domestic recession for many years and
depending largely on the external exports to create trade surplus. Following
the current crisis that erupted last year, automakers and construction
industries are landing in red in addition to the persistent slump in housing
markets. As the major importers for Japanese goods, US and Europe have
contracted tremendously in their consumer demands for general goods. In
our opinion, the stimulus measures and monetary policy from US government
will hinder the recovery of Japan due to the rise in yen without any
substantial real growth in it.

Following the model of US new banking measures, Europe's banking sector

may enter into a new phase of restructuring once they have gone through a
series of stress tests that are scheduled for coming September. Besides
having a higher key interest rate at 1% that can attract more investors, the
expansion of Eurozone wishes to go beyond the current 16 nations in years to
come so as to eventually create a larger economy.

Nevertheless, we feel it is essential for European Union to unify their treasury

instruments in order to attract more invested funds. Currently, the unification
of a single currency may not be sufficient to basket the incoming global
investments due to the vast differences in the performances of the 16
economies. Since the bonds markets usually hold the biggest liquidity, the
issuance of a single euro treasury bonds may streamline many such interests
and facilitate the ease of tapping into one large market by the global
investors without hassle.

Behravesh: In Japan and Europe more fiscal stimulus is needed. In Europe

(especially Germany and Austria), more needs to be done to fix their ailing
banking systems. Without that, recovery will be a long way off.

What will be the role of BRIC/emerging economies in economic revival?

Elston: BRIC countries may be able to stimulate their own economies, but it is
hard to see how they are going to play a role in helping to revive growth in
western economies. Infrastructure spending in China and India may boost
demand for commodities and energy, helping countries like Russia and Brazil,
but the benefits to large western economies will be limited.

Wong: As mentioned earlier, the merging markets have higher demands

generated for raw materials and commodities. Among the big four emerging
giants, China is definitely taking up an important role in counterbalancing the
weakness of the global crisis. Since it has become the biggest creditor to the
US government, China should be spending more efforts to expand its
industrial technologies and relevant researches by learning from the western
terminology. Together with India, both should focus on their recovery by
encouraging more consumer spending and multi-facet growth, but keeping
the inflation in check.

Currently, India is still considered an agricultural country. In our opinion, the

government should help to uplift the domestic lifestyle of middle income
group, thus lessening poverty. As the growth of India is now staked largely on
exports of human intelligence and expertise, more steps should be taken to
improve the internal growth of multi-manufacturing by allowing foreign
capitalization on a structured basis.

Russia is basically an oil-driven economy while Brazil relies on agricultural

output as its main income source. In summary, the BRIC economies are able
to expend the utilization of commodities in metals, energies, building
materials, etc., thus helping to maintain the output of such producers without
causing a second crisis.

As these four emerging markets have the potential to create the largest retail
market in their own respective regions, maintaining the consumer demands in
many areas, such as real estates, household products, and personal and
luxurious items, will effectively inspire the manufacturing industries to be
viable. From the macro-view, more external trade partners are encouraged to
smoothen out the market demands as well as in the dual-way of reverse
importations. However, foreign capitalization needs to be well-controlled to
prevent hyperinflation.

If the inflation rate can be well-maintained, with generation of growth, the

gradual increment of value in the respective currencies of the BRIC economies
will be a good benchmark to offset the deficits of other trade partners. This
can counterbalance the recovery from recession in many developed countries
and also act as an increment to national wealth. Then again, this has to be
done cautiously without jeopardizing the living cost of their own citizens.

Behravesh: Unfortunately, much of the world is still counting on the US to

lead the recovery. With the exception of China, the BRICs are still too small to
be true engines of global growth. China has been something of a locomotive
for commodity exporting countries. The recent rise in commodity prices
suggests that China's economy is on the mend.

Any other view?

Wong: In summary, the global economy moves in the boom-bust cycle that
changes every 1-2 decades. To explain in a simple way, it is best to liquidate
your assets at the top of the boom-cycle and start building your portfolio
again at the bottom of the bust-cycle.

As we foresee, the global markets will plunge down to make another

consolidation in the third quarter, it will be stressful for all governments to
start planning more stimulus packages in order to revive the economy. Over
the next 1-2 years, their role is to ensure no more impact surfaces and do
their best to contain any second possible crisis as mentioned earlier. While we
expect the global economy to recover in another 3-5 years, it will be a good
opportunity for individuals to build their wealth portfolio out of this potential
bottoming phase.

*Strategist, Aberdeen Asset Management Asia Limited

**CEO / Principal Consultant, PWforex.com, Singapore

†
Executive Vice President, Chief Economist, IHS Global Insight, USA