Macro economics - Slow and fragile recovery

Macro economics - Slow and fragile recovery


Achieving a “strong, balanced, and sustained world recovery” - requires two fundamental and difficult economic rebalancing acts according to IMF. First, internal rebalancing: When private demand collapsed, fiscal stimulus helped alleviate the fall in output. But fiscal stimulus has to eventually give way to fiscal consolidation, and private demand must be strong enough to take the lead and sustain growth.

Global economy:
Achieving a “strong, balanced, and sustained world recovery” - requires two fundamental and difficult economic rebalancing acts according to IMF. First, internal rebalancing: When private demand collapsed, fiscal stimulus helped alleviate the fall in output. But fiscal stimulus has to eventually give way to fiscal consolidation, and private demand must be strong enough to take the lead and sustain growth.
Second, external rebalancing: Many advanced economies, most notably the US, which relied excessively on domestic demand, must now rely more on net exports. Many emerging market economies, most notably China, which relied excessively on net exports, must now rely more on domestic demand.

These two rebalancing acts are taking place too slowly. Private domestic demand remains weak in advanced economies. This weakness reflects both a correction of pre-crisis excesses and the scars of the crisis. US consumers who had over-borrowed before the crisis are now saving more and consuming less, and while this is good for the long term, it is a drag on demand in the short term. Housing booms have given way to housing slumps, and housing investment will remain depressed for some time. And weaknesses in the financial system are still constraining credit. Also external rebalancing remains limited.

The result is a recovery that is neither strong nor balanced and runs the risk of not being sustained.
In most advanced economies, weak consumption and investment, together with little improvement in net exports, are leading to low growth. Unemployment is high and barely decreasing. By contrast, in many emerging market economies, where excesses were limited and the scars are few, consumption, investment, and net exports are all contributing to strong growth, and output is once again close to potential.

The debt-crisis in Europe continues to matter, as the Irish bailout proved to be inevitable in the end. But the next question is prompted immediately; will Portugal be the next Eurozone country to be rescued? The size of the Irish bailout is likely to be EUR 80-90 billion coming from the EU and the IMF. For comparison, the package that bailed out Greece earlier this year amounted to EUR 110 billion. Meanwhile, the US continues with its search for growth by applying a continued expansionary monetary policy. The latest move from the US Fed means another 600 billion of “greenbacks” are being printed for circulation in efforts to forestall deflation.

The October Global PMI from Markit showed that growth of the global private sector economy accelerated for the first time since April, reducing concerns about a possible "double-dip" recession. The improvement was broad-based by sector, with both manufacturing and service sector activity rising at stronger rates. Manufacturing continued to lead the recovery, with production rising at the fastest rate since June.

While the upturn in manufacturing growth is welcome, the missing ingredient so far in the recovery has been meaningful growth in the service sector, as subdued domestic demand in a number of nations, linked to high unemployment, is acting as a brake on growth. Within the Eurozone, growth of all-industry business activity remained uneven by nation. The "big two" Euro area economies of Germany and France continued to lead the recovery in the region.

Source: Markit

As stated above, the East is developing quite differently from the West. Take India for instance. While interest rates remain very low in large parts of the developed world, rate hikes have taken place elsewhere. In early November, India raised its interest rates for the sixth consecutive time this year because the economy is growing too fast. The hike in short-term lending and borrowing rates by the Reserve Bank of India (RBI) was made on account of the high inflation rate and is expected to dampen industrial growth, particularly in interest-sensitive sectors such as consumer durables, cars and the housing segment. Headline inflation stood at 8.6% for August, while food inflation, which has been double digits for over three months, stood at an elevated 13.75% for the week ending 16 October. The RBI retains GDP growth forecast at 8.5% for 2010-11. In the first quarter of 2010-11, the economy grew at 8.8%.

Source: Wulffmorgenthaler

China is also expecting solid growth. As a response to higher inflation than the nation aims for, the People’s Bank of China (PBC) ordered an increase in the required reserve rate (RRR) to 18.5% for large banks, up from 15.5% in 2009, in a move to limit lending and control money and credit issuance. This is the fifth time the RRR has been hiked by PBC in 2010. China is struggling to control inflation in an environment of particularly strong price rises on food commodities. Food consumption is close to 40% of private consumption and excessive money supply, not only in China and the US but in most of the World’s economies, has been fuelling commodity price rises and inflation risk.

Source: Jyske Bank

What can be done to improve things?
1) Wherever private demand is weak, central banks should continue with accommodative monetary policy. 2) Wherever needed, governments must continue both financial repair and financial reform. Many banks remain under-capitalized, and tight credit is constraining segments of demand. 3) Again, wherever needed, governments must address fiscal consolidation. What is essential is not so much phasing out fiscal stimulus now, but offering credible medium-term plans for debt stabilization and, eventually, debt reduction. 4) Emerging market economies with large current account surpluses must accelerate rebalancing. This is not only in the world economy’s interest, but also in their own.

All these factors are interconnected. Unless advanced economies can count on stronger private demand, both domestic and foreign, they will find it difficult to achieve fiscal consolidation. Worries about sovereign risk can easily derail growth. If growth stops in advanced economies, emerging market economies will have a hard time decoupling. Intra-Asia demand has grown strongly in the last two years compensating for lower exports to advanced economies. This has also resulted in higher volumes on the backhaul leg (West to East) for containerships, making the trade more balanced. The need for careful policy design at the national level, and co-ordination at the global level, may be even more important today than at the peak of the crisis, a year and a half ago.

As global economics is the starting point for all seaborne demand in all shipping segments, a sustainable recovery must be achieved before the solid and uninterrupted demand once again can create the upswing that is needed to make this cyclical industry turn the sharp corner. 2010 has been a positive turnaround for container shipping, with volumes back at 2008 levels; meanwhile, tankers are still lagging behind past demand peaks while volumes in the dry bulk sector have grown firmly throughout the crisis. Continued growth in traded volumes is crucial for the shipping industry to balance out the looming oversupply of capacity.

The global economic challenges continue to have a large spillover effect onto shipping demand. As advanced economies are still experiencing difficulties getting private demand up and running, the container shipping industry continue to suffer from this. The dry bulk segments benefitted likewise to a large extent from the Chinese stimulus package and the general strong demand from the less indebted developing countries importing dry bulk commodities to grow. In between the tanker markets are currently in limbo. The demand from the East is currently the only strong demand-side contributor to the tanker market – supporting primarily crude oil tankers. Meanwhile a large fleet of product tankers continue to scrape the bottom as over supply weighs heavily in a market affected by slow economic growth in the large oil consuming areas.


in Copenhagen, DK


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