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

Economic Indicators On The Up - Fears Overblown

The Bank of Japan on Tuesday upgraded its assessment of the economy for the second straight month, encouraged by signs that the worst of the economic downturn may be over. The BOJ board also voted unanimously to keep the unsecured overnight call loan rate unchanged at 0.10% while it gauges the effectiveness of previous measures. The board last lowered the policy interest rate in December by 20 basis points.

Following its May meeting, when the BOJ raised its economic assessment for the first time since July 2006, the central bank confirmed Tuesday that the economy has continued moving toward recovery over the past month.

"Japan's economic conditions, after deteriorating significantly, have begun to stop worsening," the central bank said in a statement released together with the rate decision.

In May, the BOJ said "exports and production are beginning to level out," though economic conditions have been deteriorating. Still, economic upgrades alone don't necessarily mean the bank will change its easy monetary policy anytime soon, as economic conditions remain on the weaker side. Market participants are waiting for a news conference by BOJ Governor Masaaki Shirakawa for more details on the bank's outlook and whether or not its policy stance may change down the road.

WASHINGTON -- Home construction climbed in May far above expectations, with single-family starts rising a third month in a row and giving more evidence of stability in the housing sector.

Separately, U.S. producer prices posted their largest annual decline in 60 years last month, suggesting that the prolonged recession continues to take pressure off inflation.

Housing starts increased 17.2% to a seasonally adjusted 532,000 annual rate compared to the prior month, the Commerce Department said Tuesday. Building permits rose; apartment construction surged. The 17.2% increase was much bigger than expected. Economists surveyed by Dow Jones Newswires forecast a 7.0% increase to an annual rate of 490,000.

Toll Brothers Inc. recently reported its fiscal second-quarter loss narrowed a little. The nation's largest builder of luxury homes posted a loss of $83.2 million, compared with a year-earlier loss of $93.7 million. It recorded smaller write-downs. The company operates in 21 states and last reported a profit nearly two years ago. Toll Brothers said it expects to deliver between 2,200 and 2,800 homes during the year, compared with an earlier, March view of 2,000 to 3,000 homes.

Tuesday's report on housing showed building permits in May increased 4.0% to a 518,000 annual rate. Economists had expected permits to rise by 2.4% to a rate of 510,000. April permits fell 2.5% to 498,000. But the problems of the housing sector are not over. Inventories are way too high, in relation to new-home sales, a key measure indicates. The ratio of those for sale to property sold in April exceeded 10 months.

Layoffs and tight credit are holding back sales. And mortgage rates have started rising, pushed by rising government bond yields. Investors are concerned about inflation because of increased spending in Washington meant to pull the economy out of recession. Freddie Mac data showed the average on a 30-year mortgage loan was 5.59% last week -- 73 basis points higher than the average four weeks earlier of 4.86%, an advance that could hurt demand for houses.

A report Monday indicated builder confidence faltered in June, after going up two straight months. The National Association of Home Builders index on builder confidence in sales of new, single-family houses fell to 15 from 16 in May. "The issues in the housing market are going to take some time to play out and won't reverse nearly as soon as some would like," Dan Greenhaus, a bond market analyst at Miller, Tabak & Co. in New York, said in reaction to the NAHB report.

Tuesday's data said starts in April dropped by 12.9% to 454,000; originally, Commerce reported April starts fell 12.8% to 458,000. Year over year, housing starts were 45.2% lower than the pace of construction in May 2008. Single-family starts climbed 7.5% to 401,000, after rising 3.3% in April and 1.1% during March. Construction of housing with two or more units jumped 61.7% to 131,000; within that category, groundbreakings of homes with five or more units -- or multifamily -- were 77.1% higher. Regionally, housing starts climbed 16.8% in the South, 2.0% in the Northeast, 11.1% in the Midwest, and 28.6% in the West. Nationwide, an estimated 51,200 houses were actually started in May, based on figures not seasonally adjusted. An estimated 48,100 building permits were issued last month, also based on unadjusted figures.

German economic expectations in June rose to 44.8 from 31.1 a month earlier and experts predict a recovery will start by year-end, the Center for European Economic Research said Tuesday. It was the highest reading since May 2006. Economists in a Dow Jones Newswires consensus forecast had expected a reading of 37.0. The center, also known as ZEW, after its German initials, said the increase showed that economic optimism is becoming entrenched.

"The assessment of the experts indicates that the economic downturn dynamics are currently coming to rest. They further see tendencies for a recovery at the end of this year," said the president of ZEW, Wolfgang Franz, who also heads the council of economic advisers to the government.

Survey participants also revised their assessments of the current situation, which in June rose to -89.7 from -92.8 the month earlier, the center said.

"What we see now for the first time (in a while) is that also the assessment of the current situation is improving," said ZEW economist Peter Westerheide.

In tandem with the economy, many of the 271 survey respondents expect inflation to return. Prices in Germany were mostly unchanged last month on an annual basis, official data showed recently. "A deflation scenario is not really on the horizon," as of now, Mr. Westerheide said. "Just a small minority of respondents" sees further downside price pressures, he added.

The experts also expect the European Central Bank, which sets interest rates for the 16 countries using the euro, to hold its policy rate steady at 1% over the next six months. ZEW's survey also showed that expectations rose across a number of industrial sectors. The more optimistic assessment was most prevalent in banking and investment products, Mr. Westerheide said.

WASHINGTON - The U.S. economy is healing faster than anticipated but still at an anemic pace that's unlikely to soon produce either jobs or inflation, according to the International Monetary Fund. In its annual review of the U.S., the IMF forecast that the U.S. economy would contract by 2.5% this year, compared with the 2.8% decline the IMF predicted in April. For 2010, the IMF forecasts the U.S. will grow 0.75%, rather than the zero growth it predicted two months ago.

The IMF said the U.S. was benefiting from monetary and fiscal stimulus, and from some improved stability in the financial markets. The tepid growth rate was likely to keep inflation in check in the short term, with the consumer price index expected to decrease 0.5% in 2009 and increase 1% next year, the IMF forecast.

John Lipsky, the IMF's deputy managing director, interpreted the recent increase in Treasury bond yields as a positive sign. He said the rise reflected "the effectiveness of policy in reducing fears of really serious negative outcomes," and an increased willingness of investors to search out riskier investments.

Longer term, the IMF said, the U.S. needed to "develop and communicate" a strategy for withdrawing monetary stimulus and fiscal stimulus. Otherwise, such stimulus "may stoke concerns about inflation and rising debt, exerting upward pressure on interest rates."

But the IMF advised the U.S. to start cutting back only after a "sustainable recovery is under way." The IMF didn't expect that to occur shortly.

Mr. Lipsky said the IMF didn't expect U.S. unemployment to stop rising until the second half of 2010, even if the U.S. economy grows somewhat before then. The IMF also warned that U.S. debt may rise to 75% of gross domestic product by 2011, nearly twice what it was in 2008 -- and higher than the 70% of GDP forecast by the White House.

"Looking forward, such a rise in debt may put significant pressure on Treasury bond rates," the IMF said.

Calling the administration's economic assumptions "relatively optimistic," the IMF said the U.S. needed to cut spending or boost revenue by an additional 3.5% of GDP through 2019 to keep to the debt levels sought by the White House -- 70% of GDP in 2019.

The IMF laid out a number of possibilities for boosting revenues, including reducing the deductibility of interest on corporate debt and on household mortgages, and raising energy taxes. Any one of those proposals would be a tough political sell in Congress. The U.S. Treasury, in a statement Monday, said the analysis reflected the IMF's "independent judgment" of the U.S. economy, and that the U.S. supported its public release. The statement didn't comment on the specifics of the analysis by the IMF.

p/s photo: Elanne Kong Yuk Lam

Paul Krugman Thinks US Recession Will Be Over By September

For Krugman to be so bold in making that statement, its becoming a media circus. How are you going to take popularity votes from Roubini unless you make these aggressive calls that make everyone sit up and take notice. Even if your call does not work out, you are an outstanding economist, you role in life is to justify and explain why your predictions did not turn out the way you predicted. Great way to stay in the media focus and still be just doing your job, without achieving anything really in the end... mommas, don't let your sons grow up to be economists!!

--------------

The US economy probably will emerge from the recession by September, Nobel Prize-winning economist Paul Krugman said.

"I would not be surprised if the official end of the U.S. recession ends up being, in retrospect, dated sometime this summer," he said in a lecture today at the London School of Economics. "Things seem to be getting worse more slowly. There’s some reason to think that we’re stabilising."

US stocks erased an earlier decline after Krugman made his comments. The Standard & Poor’s 500 Stock Index was little changed at 939.14 in New York after slumping as much as 1.5 per cent earlier, and the Dow Jones Industrial Average gained 1.36 points to 8764.49.

Krugman, a Princeton University economist, has warned recently that the US government hasn’t done enough to help the country’s economy recover. Last month, at a conference in Abu Dhabi, he said the fiscal stimulus is "only enough to mitigate the slump, not induce recovery".

The National Bureau of Economic Research, based in Cambridge, Massachusetts, is the official arbiter of US recessions and expansions. Last week, Robert Hall, the head of the NBER’s business-cycle-dating committee, said it’s "way too early" to say the contraction is over.

The US has been in a recession since December 2007, and the NBER may take months to decide when a trough has been reached. Recent reports have shown an easing of declines in industrial production and other measures that the group reviews when determining whether the economy is in a recession.

Even with a recovery, "almost surely unemployment will keep rising for a long time and there’s a lot of reason to think that the world economy is going to stay depressed for an extended period," Krugman said.

The unemployment rate jumped to 9.4 per cent in May, the highest since 1983, partly reflecting more people joining the labor force to look for work.

The US Federal Reserve’s efforts to stabilise markets - measures that have swelled the central bank’s balance sheet - have helped, Krugman said. "A lot of the spreads in the markets have come down” and “the acute financial stuff seems to have come to a halt," he said.

Fed officials lowered the benchmark interest rate to a target range of zero to 0.25 per cent in December and have switched to using credit programs and outright purchases of Treasuries, mortgage-backed securities and housing agency debt as the main tools of monetary policy.

$US2.31 Trillion

The balance sheet’s size peaked at $US2.31 trillion in December. It has fluctuated around $US2.1 trillion over the past two months.

The Fed’s swollen balance sheet is "a little alarming. In the long run you really don’t want the central banks to be so involved in the business of lending," Krugman said. "But it’s arguably necessary" even if there are questions about "where does it stop?"

p/s photos: Kim Ahep

USD Weakness Underpinning Stocks' Climb

If you look at the cumulative show of economic indicators, we are seeing some recovery. Naturally, economists being good economists, will NEVER embrace them as signs of total recovery, but will question the sustainability - thats what pisses me off about economists, one of many things. While economic figures are good, the one binding factor which is sustaining markets globally is the weaker USD. That alone makes US stocks that much more attractive. If US stocks are not falling, chances are good that the rest of the world will not be falling.

The one reason that could shake the upward climb has to be the North Korean situation, so monitor it closely.

Improving vital signs across the globe - from US GDP to Japanese factory output and British house prices to German retail sales - raised hope on Friday that the world economy was responding after months in intensive care. The US economy shrank 5.7 per cent from the first quarter of 2008, less than the previous estimate of 6.1 per cent and slightly worse than market expectations for a 5.5 per cent fall. The report confirmed that economic activity declined for three straight quarters for the first time since 1974-1975, but US stocks rose in part on data showing corporate profits after taxes increased 1.1 per cent - the first increase in a year and a turnaround from a 10.7 per cent drop in Q4.

The potential General Motors Corp bankruptcy also hovered over the world financial picture as GM shareholders and bondholders braced for a Chapter 11 bankruptcy expected by Monday's restructuring deadline.

It's clear that based on the market action, that we've turned a corner in this economy. The question that I have is, when we get a clear view of what's around the corner, is it going to be better growth and moderate inflation, or is it going to be slow growth and bad inflation? While US stocks marked their third straight monthly advance, the dollar fell to five-month lows against a basket of currencies as an advance in global equities and signs of an easing global recession drove investors to snap up higher- yielding currencies and riskier assets.

Gold, metals and soft commodities also rose on the weak dollar. Oil rose to a six-month high above $US66 per barrel.

The United Auto Workers union ratified a new cost-cutting labor agreement with GM to clearing a major hurdle in the automaker's restructuring. With US and foreign automakers, suppliers, workers and retirees all holding a stake in the outcome, GM and Canadian auto parts group Magna International Inc also reached an agreement in principle that could rescue GM unit Opel. The GM saga is also a test for US President Barack Obama, hoping for a quick resolution of the process in which the US Treasury would temporarily hold a majority stake in the venerable US automaker. Obama got a boost when advisers to GM bondholders representing $US27 billion in the automaker's debt urged investors to support a debt swap negotiated with the White House over the past week. Bondholders have until Saturday to register their support for the terms of a deal that would give them up to 25 per cent of a reorganized GM. That offer is contingent on the US Treasury determining that enough investors have signed on in support.

In Asia and Europe, data pointed to signs of recovery. Japanese factory output rose 5.2 per cent in April, the biggest jump in more than half a century, and manufacturers forecast further gains, while South Korean industrial output expanded for a fourth straight month.

German retail sales showed a 0.5 per cent month-on-month rise in April, while private consumption for the first quarter rose a similar amount, despite a 3.8 per cent contraction in GDP. In Britain, house prices registered a surprise rise in May - the second time in three months - but economists were cautious. Indian GDP beat forecasts with growth of 5.8 per cent year- on-year in the March quarter, with strength in services and construction outstripping a decline in manufacturing.

p/s photos: Satomi Ishihara