Keeping an eye on the recovery date
Feb 4 2009 By Andrew Miller, The Journal
THE big chill has descended, in more ways than one. The hit to economic growth towards the end of last year was bigger than we had pencilled in, with no part of the globe remaining unscathed.
As a result, it now looks fairly likely that the global economy will shrink a little this year. Nevertheless, we still feel that a recovery can begin as soon as the second half of 2009 in the United States, although it may well be 2010 before the United Kingdom or Japan join in.
Although policymakers are still struggling with the implications of the credit crunch for their banking systems, they are yanking on plenty of policy levers to help bolster demand, and set the stage for an eventual recovery in economic activity. So it seems likely that official interest rates will end up being slashed further.
Australia has already set the stage here, with a 100bp cut yesterday, and the UK and South Africa will likely follow suit with big cuts of their own this week. And many central banks will go further than this, finding less conventional methods to support activity.
Having driven short-term interest rates down to close to zero, many central banks are using public funds to help lower yields (ie, rates) on other financial instruments. To implement this ‘quantitative easing’, they may print money and use it to buy government bonds of longer maturity. Or, as in the USA, to buy other assets. (Such as mortgage- backed securities, so that mortgage rates for borrowers start to decline). In theory, the central banks around the world could drive borrowing costs down to any level they so desired, and for just about any type of borrower.
There has also been increasing enthusiasm for a more determined approach to fiscal policy. Before Christmas, several large countries had been lukewarm about joining in the severe fiscal easing planned by the US, UK, France, China and others. But now practically everyone has joined the party. In effect, after subtracting the hit to pubic finances from the slowdown, governments are intending to throw another couple of percent of GDP at the problem, either by cutting taxes or spending more money themselves, or both.
And finally, extraordinary times may call for extraordinary measures. Suggested non-traditional policies include giving households vouchers to spend; providing financial incentives to replace household durables sooner than they would have otherwise done – along with governments lending directly to the non-financial sector; and providing credit guarantees to companies.
We still expect a brutal recession that will entail a contraction of GDP in the first half of the year, at a minimum, and associated downward pressure on prices. Policymakers will have to use every tool in their toolbox to turn things around. But, ultimately, they should manage to get the global economy back off its knees again.
Once the shoots of economic recovery appear, risky asset classes such as equities should recover somewhat. But that may be a story more for the second half of the year, or perhaps the second quarter – if we are lucky.
Andrew Miller is regional centre manager for Barclays Wealth
