FYI | Sep 14 2009
By Andrew Nelson
There’s little argument that some sort of recovery is under way and it may well appear to be a strong one over the next six months or so if government policy around the world continues to feed through. Inventories are correcting and confidence is rising, but Standard Chartered warns that we shouldn’t let ourselves be deceived by this V-shaped bounce because no matter how it looks now, the global economy is not back to normal and there are still problems aplenty.
Some big changes still need to be made, not first of which is debt restructuring in the West and the overall rebalancing of economies across the globe. Group Head of Global Research at Standard Chartered Gerard Lyons says that going forward, growth in the West can no longer be primarily driven by debt and growth in Asia cannot continue to be driven just by exports. And this will take time, not just to happen, but even for the idea to just sink in. While he notes some encouraging progress is being made in emerging markets like China, India, Indonesia, and the Middle East, much more remains to be done.
This belief makes the upcoming G20 meeting in Pittsburgh crucial, as Lyons feels policy makers must move decisively to rule out premature policy tightening and ensure there is no sort of move back towards protectionism. Asia and the Middle East must save less and spend more to allow their currencies to appreciate.
The good news is that this year has been a good one for global policy coordination and in the face of the GFC, central banks the world over have banded together to stem the flow. Lyons notes there have been two successful G20 summits so far and he hopes that the G20 summit in Pittsburgh at the end of month will be another one. A positive precursor was the G20 Finance Ministers’ meeting in London last week, with leaders united to the point that the IMF was given a big injection of capital, which was accompanied by some unprecedented commitments from China and other key developing nations.
However, the move to increase capital requirements for banks has alarm bells ringing with Lyons, as he sees it as representing a certain “risk to a sustained recovery”. He thinks central banks must keep monetary policy accommodative, with the US, UK, Japan and Europe needing to ensure they maintain a prolonged period of low rates. Otherwise, the global consequences could be painful, he predicts.
Balance-sheet adjustments take time, unemployment is expected to continue to trend higher over the near-term, meaning the global recovery is still fragile at best and premature policy tightening would be the worst thing for it, says Lyons. He notes that world leaders may be feeling a bit cocky when they meet in Pittsburgh, especially those from the West, but Lyons points out the recovery, so far, has been driven by emerging economies like China, where the policy stimulus has been significant.
Yet while Lyons feels that western leaders need to keep an open mind going into the talks, he also notes the global imbalances that contributed to this crisis remain a threat.
One of the main problems has been increasing savings in China and the Middle East, which has seen these economies build up enormous currency reserves. This has allowed big borrowers like the US, Spain, and the UK to live beyond their means. The rapid growth these economies have enjoyed over the last few years is thus, at least in some part, artificial. It has come at the expense of large trade deficits and low savings.
Asia has an important role to play and by saving less and spending more, Asian currencies will be able to significantly appreciate against the US dollar, helping to restore the balance that has been lost. A failure to achieve this balance, thinks Lyons, would mean that any global recovery is destined to be “ultimately doomed”.
The move from high savings to increased demand will need many things, notes Lyons, like better social safety nets, help for small and medium-sized firms, and further development of Asia’s financial markets. All this will take time.
Yet Lyons still admits the economic outlook is improving and it should continue to do so at least over the near-term. This, he says, should see markets continuing to advance. However, a jobless recovery in the West and increasing investment inflows remain the key, as these factors will not only add to growth, but also to rising asset and commodity prices across the emerging world. These will be the true factors supporting a recovery.
