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Standard & Poor's the credit ratings agency, says in its latest Global Economic Outlook that the global economy seems to have turned a corner, and so-called green shoots are sprouting around the world. Governments' coordinated monetary and fiscal efforts largely help explain the apparently simultaneous -- if slow--recoveries that many countries began to enjoy late last year, but the primary cause of the recovery is that world financial markets are getting back to normal, again in large part because of heavy intervention by central banks and government agencies.
However, S&P says the extent of the rebound varies by country: It remains in low gear for Europe and North America, while others, notably China and India, are moving ahead at full speed. Moreover, the recoveries in most of Latin America and Australia, meanwhile, are moving at a relatively steady pace. The US economy, which went into recession a little earlier than its peers, likely bottomed out in the second quarter of last year. The downturn in Europe was deeper than in the US but ended at roughly the same time, in part because of major monetary and fiscal stimulus. However, softer economic growth in the fourth quarter of last year and fears about sovereign risk in some European countries have heightened concerns about the recovery's strength. Japan suffered the deepest recession of the major industrial countries. It's emerging sooner than the agency expected, with exports benefiting in part from Chinese strength. However, weak export growth in non-Asian trading partners and soft domestic demand will keep the recovery slow.
S&P says Developing Asia remains in the best shape of the major regions. Chinese growth slowed because of the reduced demand for its goods in the industrial world, but an enormous (relative to its economy: 13% of GDP over two years) fiscal stimulus program concentrated on infrastructure spurred domestic employment and production. India depends less on exports than China but also has less room for fiscal stimulus because of its budget problems.
India's GDP growth has slowed more than China's but remains relatively strong. Both nations have looser ties to world financial markets than most other countries and thus suffered less from the financial panic.
US
The S&P economists say that US GDP fell for four consecutive quarters, from the third quarter of 2008 through the second quarter of 2009, with a peak-to-trough drop in real GDP of 3.8%. Also as expected, signs of recovery began to emerge in the second half of 2009, as the tremendous amount of liquidity and government spending fed into the economy.
S&P expects US GDP growth to reach 2.7% this year, near its long-term trend though well below the average 5% rate during the first year of a recovery. Housing has stabilised, though it will likely offer little support to the expansion through 2010. Housing starts and sales hit bottom last spring, but home prices aren't likely to hit their trough until midyear.
The dollar may be facing more problems this year. The sovereign crisis in Europe has overshadowed earlier investor fears outside the US about the risk of a move away from dollars in the reserves of major foreign countries. However, these fears could resurface once Europe is able to stabilise the sovereign risk of certain countries, such as Greece, resulting in both a sharp drop in the dollar and a rise in US interest rates, delaying or dampening an economic recovery. The ratings agency expects the enormous US fiscal and trade deficits to push the dollar lower next year.
Europe's recovery is shakier
On Wednesday, Germany reported that exports fell 6.3% from the previous month in January but analysts said the severe weather had an impact.
On the brighter side, French industrial production rose by 1.6% on a monthly basis in January while monthly Italian industrial output jumped by 2.6% in in January. On Monday, Germany reported that production in January increased by 0.6%.
On Tuesday, it was reported that the UK's trade gap with the rest of the world widened unexpectedly in January to its largest since August 2008.
Exports saw their sharpest drop in more than three years, according to the Office for National Statistics (ONS) despite sterling having fallen by some 24% against a basket of world currencies since early 2007 - - prior to the Great Recession.
The UK's trade gap in goods and services widened to £3.8bn, compared with £2.6bn in December -- again, the bad weather may have made the situation worse.
S&P says the economies of the Eurozone and the UK contracted 3.9% and 4.8%, respectively, in 2009, compared with modest 0.5% growth for both in 2008. But while signs suggest that the worst of the recession is over, both the Eurozone and the UK will likely see tepid growth of 1.2% in 2010, which is below their long-term trends. Moreover, the slowdown to 0.4% growth (annual rate) in the fourth quarter of last year, together with heightened sovereign risk, highlight how fragile the recovery remains.
GDP in Europe seems likely to recover more slowly than in North America. The slowdown was more severe than the markets expected, which suggests that the phasing out of stimulus measures is starting to have an impact.
Several persistent negative factors will keep recovery slow through 2011. The financial crisis was the main source of pain for the major European countries, particularly Ireland, Spain, and the UK, forcing debt-ridden consumers to cut back on spending while housing markets collapsed. This credit crunch is improving very slowly, as recent bank lending data demonstrate. Tight lending conditions are also likely to hold back a recovery in capital spending. Although large companies have been able to secure some financing in the bond markets, small and midsize companies have less access. Moreover, the heightened uncertainty about sovereign creditworthiness has increased funding costs for banks and corporations, along with the sovereigns themselves.
CNBC's Steve Liesman has the highlights from the 2010 US National Association of Business Economists (NABE) Economic Policy Conference. Scott Nations, of NationsShares, and CNBC's Rick Santelli share their insight:
Japan's is sluggish but South Korea's has been swift
S&P says Japan continues to emerge from its worst recession since World War II, but the agency expects the recovery to be slow there as well. After seven years of sluggish expansion, the economy buckled under the credit crisis, as the stronger yen and a tumbling US economy cut exports. Real GDP fell 1.2% in 2008 and 5.0% in 2009, the biggest decline of any of the major developed economies.
The recovery is likely to remain slow because increased public spending won't be able to offset the tepid growth of exports and domestic demand. Although the strong Chinese economy is providing some help, growth in Japan's major non-Asian trading partners remains soft; S&P believes that its GDP will grow a modest 1.5% in 2010.
South Korea's recovery, on the other hand, was one of the earliest and strongest in the region. Expansionary fiscal and monetary policies, together with an improvement in exports, supported positive growth in 2009, after an earlier severe contraction. In particular, exports to China helped insulate South Korea somewhat from weakness elsewhere. The Korean economy grew 0.2% in 2009, and while it was the lowest growth since the 1997-1998 currency crisis, it was much better than the markets had expected. S&P expects the Korean economy to do well in 2010, growing by about 4.8%.
Resilience in Australia
After a relatively mild downturn last year (compared with those of other developed economies), Australia's economy may recover more strongly than was initially expected. S&P now expects Australia's GDP to grow 3% in 2010, with a relatively healthy labour market and strong household net worth supporting household consumption.
Australia's economy has showed considerable resilience. Fiscal stimulus and the surprising strength of the country's commodity exports, especially to China, have helped counter the impact of weak demand from the US. China's rising demand for commodities will continue to boost Australia's exports. Although risks remain, S&P is cautiously optimistic that Australia will be able to sustain its recovery, but the strength will depend somewhat on the timing and scale of stimulus withdrawal.
Latest trade data out from China confirms a trend showing strong domestic Chinese growth, observes Beat Lenherr, chief global strategist at LGT Capital Management. He shares his outlook on the economy, with CNBC's Chloe Cho:
Developing Asia's recovery is the strongest
S&P says while the economies in most industrialised nations are slowly climbing out of recession, other regions have been able to dodge major downturns. Developing Asian economies, for instance, have suffered only minor injuries. China, the main growth engine in the region, and India continue to grow quickly, despite the global slowdown.
Amid the worst global recession since World War II, China's GDP expanded by 8.7% in 2009, higher than the 8.3% expected six months ago, largely because of the enormous fiscal stimulus of RMB4 trillion (US$585 billion). India grew by 6.5%, also much stronger than the 5.6% rate expected earlier and despite an unfavourable monsoon season, which hurt agricultural output. Though surprisingly strong, those rates are still a slowdown from the respective 9% and 7.5% growth in 2008. S&P expects that record-low interest rates and fiscal support will keep growth strong, with China's and India's economies likely to expand 9.8% and 7.7%, respectively, in 2010.
Latin America avoided some of the pain
Latin America has done better in this downturn than would have been expected based on previous episodes. Relatively restrained banking policies and balanced government budgets helped insulate the region from the worst of the credit problems. More importantly, strong commodity prices, which demand from Asia has supported, kept exports strong. Brazil was insulated from some of the early problems by its independence from world energy markets. Mexico, on the other hand, has suffered more, in large part because of its dependence on the US market.
Inflation fears replace deflation for most regions
S&P says just as real economies are operating at different speeds, so is inflation (or, in some countries, deflation). Inflation fell sharply from 2008 levels for most regions, largely because of sharp declines in oil prices. Most countries have enjoyed rapidly falling inflation rates. Several countries were also flirting dangerously with deflation -- or outright falling prices--last year. Except for Japan, however, deflation has been a threat rather than an actual experience. On the positive side, the unexpectedly rapid slowing in total and core consumer prices has added to the already ample leeway central banks have to keep rates low and keep the recovery on track.
Oil prices largely explain inflation swings. After reaching a peak of $147/barrel in July 2008, oil prices fell abruptly to $40/barrel in January 2009. The decline helped support consumer spending in most developed economies. But oil has now retraced some of the decline, climbing to $78/barrel in February 2010. Clearly, oil remains a wild card for the world economy. S&P expects oil prices to remain near their current level, but our confidence in that forecast isn't strong.
The economists say they are growing more concerned about inflation risk, though not in the immediate future. US deficit spending and Fed measures could certainly create inflationary pressure. But an enormous amount of economic slack has helped offset pricing pressures.
European inflation remains modest (1% year-over-year in January). Except for oil prices, the risk is more for deflation than inflation in the near term. However, the large budget deficits run up in weaker economies could risk creating differential pressures on competitiveness. Higher inflation in Greece and the other Southern European states has hurt their ability to compete in the Eurozone.
In emerging Asia and Australia, inflation risks are apparent as the recovery gathers strength. In Australia, headline fourth-quarter consumer price inflation jumped to 2.1% over a year earlier, following a 1.3% uptick the quarter before, as a relatively healthy labour market, increased household net worth, and responsive product markets support domestic demand and higher prices. S&P projects that Australia's CPI will rise 2.4% in 2010, up from 1.8% in 2009, mostly because of commodity prices. China and India, like Australia, have also seen surprisingly strong recoveries. Commodity prices have begun to increase because of the renewed economic strength. Although volatile food prices account for much of the increase, especially in China, inflation could extend into the labor markets and, eventually, the industrial economy.
Japan is the only major country that is fighting deflation. The tepid recovery earlier in the decade had pushed prices back up, but the deep recession in late 2008 and early 2009 pushed prices back down again. S&P expects prices to start to move upward again next year, but the experience of the last 20 years in Japan shows how hard it is to break out of a deflationary trap.
Latin America has had significant struggles with inflation in the past, but went into the current world recession with relatively low rates. The last Latin American debt crisis at the turn of the century had caused countries to adopt more conservative policies and had kept inflation mostly under control. That discipline has largely continued in the major South American countries in the current crisis.
Cutting off the Tap
S&P says governments across the world had to play the role of big spender in 2009 because coordinated rate cuts and other dramatic steps to support financial markets initially had little effect. Governments thus resorted to stimulus packages to kick-start a recovery.
In the US, federal government spending will likely remain the main impetus for economic growth in the short run. The $800 billion stimulus package Congress approved in early 2009 constituted nearly 6% of US GDP (spent over two years). The US budget deficit climbed to $1.4 trillion in fiscal 2009, nearly 10% of GDP. The deficit will likely hold at $1.4 trillion in 2010, dropping to $1.1 trillion in 2011 because of reduced spending from the phase-out of stimulus programs and improved tax revenues from a stronger economy.
European governments generally adopted smaller stimulus packages than the US (with Spain a notable exception). Within Europe, there has been little correlation between the size of fiscal stimulus packages and growth, with the more conservative governments actually seeing a bit better performance than the more generous. With government incentives phasing out this year and continued tight lending standards, S&P believes growth will remain sluggish.
The Japanese government also increased spending, despite its weak fiscal position. However, government action to address the nation's economic woes last year had been relatively ineffective. Public investment in infrastructure programs, which drove growth in the first half of 2009, lost steam thereafter because policy measures focused more on social services and less on infrastructure. S&P's analysts believe Japan's weak fiscal position and a stalemate in parliament have led to a situation in which solutions are likely to be limited and late.
China's policies more successfully propped up domestic demand growth. The Chinese government's stimulus package in November 2008 (13% of GDP, spread over two years) helped fuel the recovery. The government had already planned a number of infrastructure projects that it was able to accelerate quickly. Moreover, the government tax rebates and subsidies that spurred sales last year have been extended into 2010. These incentives should help consumers contribute more strongly to growth this year, despite the slowdown in bank lending that the government is forcing.
The US dollar drops
S&P says the US dollar has strengthened against most major currencies in the past few weeks on worries about Greece and the European economy. The dollar is up 3% since December 2009 on a broad basis and 5.3% against other major currencies. It still remains down 9.5% over the past year on concerns that China and other countries with trade surpluses are moving away from dollar-denominated reserves. The dollar fell to about $1.5 against the euro in November on increased dollar risk, before strengthening to $1.35 more recently on flight away from the euro.
The dollar will likely weaken later in 2010, assuming that the European credit worries fade, because of concerns about the huge US government deficit created to fix the US credit crisis, the still-large current account deficit, and the continued diversification of reserve balances. A weaker dollar would help real growth in the US next year by encouraging exports and slowing import demand. However, it could dampen economic expansions in countries that compete with the US.
Slowly climbing to safer ground
S&P says the global economic contraction appears to be over. The major upheavals in the global financial markets and national economies are beginning to fade. Lower oil prices and many countries' fast and coordinated monetary and fiscal stimulus helped soften the sting. The pace of recovery has been sluggish in most developed countries, with long-term economic sustainability still at risk. Emerging Asia, on the other hand, has rebounded with surprising strength, boosting expectations that a self-sustaining recovery is in place.
