Macro Economics

Macro Economics


Recovery is on the way – but unequally distributed, with lack of private consumption in advanced economies

Recovery is on the way – but unequally distributed, with lack of private consumption in advanced economies

Global economy:
The global recovery is off to a stronger start than anticipated, but is proceeding at different speeds in various regions. IMF foresees a policy-driven, multi-speed recovery where the key emerging economies in Asia will be leading the global recovery. The global recovery is driven by the extraordinary amount of policy stimulus, both in monetary and fiscal terms. Public support of the financial sector has been crucial in breaking the negative loop between the financial and the real sectors. At the same time, there are still few indications that non-policy-induced private demand is taking hold, at least not in the advanced economies. Despite the positive news, the threat of a double dip still remains. There is still a gap to be bridged between the current and vital public consumption stimulus and a sustainable recovery, as we await private demand returning to the driving seat.

What’s happening in the US?:
US GDP growth ended its rollercoaster ride in 2009 with 4th quarter growth of 5.7%. This growth is heavily impacted by inventory build-up, which accounted for 60% of the growth. Inventories have been a central issue during this crisis. US unemployment could continue to be a drag on the economy with expectations of current level to remain for next 6 months.

The US Consumer Confidence Index improved for the third consecutive month bringing the index up to 55.9 from 53.6 last month. The rise was primarily the result of an improvement in the present-day conditions coming back from 26-year-low in November. While moderately more positive, consumers’ short-term outlook does not suggest any significant pickup in activity in the coming months. Regarding their financial situation, the number of pessimists continues to outnumber the opti¬mists. However private consumption grew by 0.6% in 2009, following a strong contraction in private consumption in 2008.

Following a decline in house building permits and house building starts, these two central indicators turned a corner in the 1st quarter of 2009 and have started a to stabilize at historically low levels with an undecided direction. US housing starts are forecast to drop by 10% from current level. While the estimated number of housing units that were authorized by building permits in 2009 was down by 36.9% as compared to 2008, positive indicators are now visible.

The fact that new houses sold also “flat lined” in 2009 is positive due to the fact that the number of new houses sold have dropped since the peak in 2005. A variety of government aid measures directed to stimulate the housing market had a positive impact as the number of new houses sold improved during the 2nd and 3rd quarter of 2009.

What’s happening in Asia?
Domestic and global inventory restocking, along with fiscal and monetary measures, are likely to support Asian growth in 2010. In 2011, Asia, lacking any major imbalances, should benefit from strengthening global demand, increasing domestic activity, improved consumer and business sentiment and easing financial conditions.

Chinese manufacturing PMI (Purchasing Managers Index) rose to new all-time-high at 57.4 in January, up from 56.1 in December. Manufacturing activity continues to accelerate and, importantly, order growth is being driven by the domestic economy. New export orders which have been the drag on the PMI since mid-2008 returned to positive growth in mid-2009. As regards the employment component of the PMI composite, it fell for the third consecutive months but remains in positive territory.

Chinese inflation was negative in July but rose by 1.9% in December. This was mainly caused by higher food and energy prices impacted by the harsh winter conditions which increased demand and negatively effected supply chains. At the beginning of 2010 it seems as if the extraordinarily rapid growth in money supply and credit over the past year could spill into inflation elsewhere also.

At early January 2010, the central bank started to drain liquidity by lifting banks’ reserve requirements, and some banks have been told to reduce their lending. China’s central bank governor Zhou Xiaochuan said that China will continue to implement “an appropriately loose monetary policy”. But the surge in lending appears to go beyond even what the government expected, fuelling concerns that it is leading to property market speculation and going to industries that were already suffering from overcapacity.

The stimulus packages implemented by Chinese authorities have successfully replaced export demand by domestic demand and made GDP grow by 10% in 2009. This has been mainly in the form of fixed-asset investments but also in the form of household consumption of subsidy-induced sale of home appliances and cars creating a large domestic demand for product from the booming manufacturing industry.

The economic recovery in India also gaining momentum, but the large fiscal budget deficit of 10% this year threatens to crowd out private investments. Low agricultural output due to the worst monsoon in years has affected food prices, and the Reserve Bank of India could make an interest rate hike to prevent inflation. The economic recovery is not only driven by economic policy measures, investments and exports; private consumption is also increasing.

The International Monetary Fund (IMF) expects the recovery in advanced economies to be weak judged by historical levels, with real output remaining below its pre-crisis level until late 2011. This leaves only little room for growth in investments as production capacity is currently abundant. High unemployment, growing public debt, wounded financial systems and weak household balances are presenting additional challenges to the recovery in the advanced economies.

In the most recent WEO Update, IMF expects global GDP to grow by 3.9% in 2010, which is an upward revision by 0.8 of a percentage point from October 2009 projections. Also, world trade volume (goods and services) was upwardly revised from 2.5% to 5.8% in 2010, which is a clear contrast to the drop of -12.3% in 2009.


in Copenhagen, DK


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