'Slow grind' scenario most likely
Aug 26 2009 by Andrew Miller, The Journal
THE initial "green shoots" of economic recovery have started to grow and branch out recently – much as many economists expected. This was helped by the sheer passage of time, as inventory cutting has proceeded.
But importantly, it also reflects supportive fiscal and monetary policy, which has fostered a return of confidence. In the phrase coined by economist John Maynard Keynes, “animal spirits” are back – and consequently the world has become a bit easier to understand, in that consensus forecasts of output for 2009 have now stabilised in a number of markets and are even beginning to turn upwards for 2010.
Another positive development is that the majority of high-frequency macroeconomic numbers (such as industrial production data) are now surprising analysts’ forecasts to the upside – leading some observers to speculate that the end of the current recession could be only weeks away.
Yet data from the major developed markets suggest only a slow turnaround. In the United States, the decline in Q2 GDP turned out a little smaller than forecast, and Q3 growth now looks likely to be positive. The downward revisions to previous data were more important, however as they suggest that the hole the economy is climbing out of is even deeper than seemed likely a quarter ago, and that future “potential” economic growth will likely be slower than what was achieved in the decade prior to this recession.
In Europe, the UK economy’s second-quarter performance was disappointing relative to expectations. Some better news came from the euro area, where the German and French economies unexpectedly expanded in Q2, but the detailed statistics did not point toward a sustainable or accelerating recovery.
Altogether, a “slow grind” scenario still appears to us to be the most likely outcome for the major North Atlantic economies. Inflation, in this sort of environment, is likely to remain at bay, thanks to high spare capacity and weak pricing power.
In contrast to Europe and the US, there is mounting evidence that emerging markets, and especially those in Asia, are returning to growth much faster.
Particularly noteworthy are developments in China. There, Q2 GDP growth ran at a rate of 7.9% year-on-year, according to official figures. Translating this into quarterly numbers is not straightforward, but private-sector estimates range from 4-5%, with our own estimate near the upper end of that range.
Whatever the exact figure, it implies that the Chinese government has been highly successful in boosting growth, primarily through lending and investment, and that its 8% GDP growth target for 2009 is well on track. True, some observers have questioned the accuracy of the figures – with provincial-level data pointing to stronger growth and electricity consumption to a weaker figure. But evidence that growth has re-ignited seems indisputable. Our expectation that Asia excluding Japan will be the most dynamic region in terms of economic performance appears to be very much on course, with China the linchpin of the upturn.
Overall, global economic recovery is clearly proceeding, albeit at multi-speed. We expect evidence of recovery to continue to build over the coming months, and consequently investors who have maintained a very defensive posture throughout the economic downturn should now consider increasing the overall risk level within their portfolio back towards long-term strategic norms, if they have not done so already.
Andrew Miller is regional office head of Barclays Wealth in Newcastle
