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    Whither The Great Recessio - Reading The Tea Leaves - 30 Aug 2009

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    The second quarter saw a global improvement in economic conditions, but with striking diversity. The third quarter will evidence a crucial test for the global economy. The roots of the Great Recession and financial crisis can be traced back to the dotcom bubble. As commodity exporters increasingly integrated into the world economy, our focus should be on structural change and longer term forces at work.

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    Whither The Great Recessio - Reading The Tea Leaves - 30 Aug 2009

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    The second quarter saw a global improvement in economic conditions, but with striking diversity. The third quarter will evidence a crucial test for the global economy. The roots of the Great Recession and financial crisis can be traced back to the dotcom bubble. As commodity exporters increasingly integrated into the world economy, our focus should be on structural change and longer term forces at work.

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    Whither the Great Recessio- Reading the Tea Leaves- 30 Aug 2009

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    The second quarter saw a global improvement in economic conditions, but with striking diversity. The third quarter will evidence a crucial test for the global economy. The roots of the Great Recession and financial crisis can be traced back to the dotcom bubble. As commodity exporters increasingly integrated into the world economy, our focus should be on structural change and longer term forces at work.

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    Whither The Great Recessio - Reading The Tea Leaves - 30 Aug 2009

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    The second quarter saw a global improvement in economic conditions, but with striking diversity. The third quarter will evidence a crucial test for the global economy. The roots of the Great Recession and financial crisis can be traced back to the dotcom bubble. As commodity exporters increasingly integrated into the world economy, our focus should be on structural change and longer term forces at work.

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    Nasser Saidi: Economics & Governance

    Nasser Saidi

    Whither the Great Recession? Reading the tea leaves


    Posted: 30-Aug-2009

    With the end of summer drawing close, questions concerning the trajectory of the world economy
    in the second half of 2009 will intensify. The second quarter saw a global improvement in
    economic conditions, but with striking diversity. Emerging Asia recorded sustained GDP growth
    led by China, while North America continued its slump, driven by profound adjustments in the
    U.S. (especially the labor market) and a weak auto sector (GM and Chrysler) despite the ‘cash for
    clunkers’ intervention. Europe was in the middle, with credit leveraged countries that resemble
    the U.S. (U.K., Ireland, Spain, Ukraine, the Baltics) and countries following in the wake of Asia
    thanks to recovery in industrial production (Germany, France, Poland, Scandinavia). The third
    quarter will evidence a crucial test for the global economy, i.e. whether the stabilization in Q2 will
    be followed by a recovery or whether there will be a ‘double dip’ recession. The forward looking
    equity markets are heavily betting on a synchronized global recovery; while the bond markets are
    comparatively bearish foreseeing a continuation of easy monetary policy –in the form of direct
    monetary injections or ‘quantitative easing’- and weak growth, more of a U- or W shaped
    outcome. Both markets cannot be right.

    Such a dichotomy is likely to persist and generate volatility in financial and commodity markets:
    the economic tea leaves portray a mixed picture so bulls and bears can find comfort in their
    convictions by attaching more importance to some data and neglecting other news. As
    economists, however, we should take higher ground and look beyond the short term. While
    ‘timing’ the end of the Great Recession is an interesting exercise, understanding the economic
    and financial factors shaping adjustment and sustained growth is more important from a GCC
    perspective. As commodity exporters increasingly integrated into the world economy, our focus
    should be on structural change and longer term forces at work.

    The roots of the Great Recession and financial crisis can be traced back to the dotcom bubble.
    When the bubble exploded, US policy makers shunned the idea of engineering an orderly
    readjustment of the economy with the inevitable fall in standards of living to more sustainable
    levels (i.e. levels compatible with long term growth patterns and productivity growth, not those
    artificially boosted by the stock market exuberance of the roaring nineties). Instead the authorities
    went in the opposite direction substituting the collapsing stimulus from private investment with a
    hike in private consumption supported by lower taxes, lower interest rates and higher
    indebtedness of households. Household leverage, measured by the ratio of debt to personal
    disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over
    the next two decades, leverage proceeded to more than double, reaching an all-time high of
    133% in 2007, with the sharpest acceleration occurring since 2000. That dramatic rise in debt
    was accompanied by a steady decline in the personal saving rate, a process that enabled
    personal consumption expenditures to grow faster than disposable income, providing a significant
    boost to U.S. economic growth over the period.

    Similarly, loose US fiscal policy with increased military & security spending reversed a budget
    surplus in 2000 into sustained deficits that are expected to peak at some 11.2% of GDP this year.
    In this policy stance the US government was fully supported by the Federal Reserve which
    maintained interest rates abnormally low, fuelling debt and leverage across the financial system
    and disregarding asset price inflation. In essence in the early years of this century while the
    corporate sector was rebuilding its balance sheet to purge the debt overhang of the nineties, the
    household sector was led to increase its consumption and its already unsustainable liabilities,
    (sustained by home equity loans and mortgage refinancing). Before the US economy can be put
    back on a sound footing and sustained growth, the imbalances accrued over the last ten years
    need to be tackled and credibly resolved. The dilemma for economic policy is trying to address
    two conflicting objectives: reviving economic growth through a stimulus for increased spending
    and household (and financial sector) deleveraging which requires increased personal saving and
    lower consumption rates!
    Nasser Saidi: Economics & Governance
    Nasser Saidi

    Whither the Great Recession? Reading the tea leaves


    Posted: 30-Aug-2009

    The process of adjustment and restructuring has barely started. At present a meltdown of the
    world economy has been avoided thanks to a massive injection of public money. In other words
    private debt in the US (and the UK) has been swapped by public liabilities together with a de facto
    nationalization of the banking sector. The process of recapitalizing and restructuring the banking
    system is just starting: the stock markets appear to have forgotten that the toxic assets are still in
    the balance sheet of the banks and that credit to companies continues to be scarce and is
    rationed!

    But to restore sustainable growth, the current account deficit of the US and other profligate
    countries must be drastically reduced while the economies of heavy exporters such as China and
    Germany must shift to a greater focus on domestic sources of growth. This process will not be a
    matter of one quarter or even a few quarters as many market participants seem to believe. The
    Great Recession is still unfolding, with continuing heavy job losses in the US and more to come in
    Europe, where social protection is stronger, this adjustment will face several hurdles and set
    backs. Moreover once the world economy stabilizes, the US, UK and other EU countries will face
    to face the burden of dealing with the unprecedented peacetime build-up of the stock of public
    debt and reforming the financial architecture. For the GCC countries the outlook and
    developments in emerging Asia will be more important than those for the advanced economies of
    the west.

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