Global Recovery Has Continued into 2010
After falling into its deepest recession in decades, the global economy started to grow again in mid-2009 and most indicators suggest that the expansion continued into the fourth quarter of last year. That said, economic activity in most countries remains well below peaks that were reached in early 2008, and it likely will be some time before these previous peaks are surpassed.
Asia is leading the way in the global recovery. Not only did most Asian governments respond to the financial crisis with large fiscal stimulus programs, but the financial systems of most Asian economies did not blow up in the autumn of 2008 because they were not highly levered at that time. Most central banks in Asia probably will start to tighten policy over the next few months. Many economies in South America are also bouncing back.
Europe appears to be lagging other regions at present. Although purchasing managers' indices have been in expansion territory for a number of months, “hard” data have generally been less encouraging. Indeed, real retail spending in the Euro-zone has not yet broken the downward trend that has been in place since May 2008. Due to the weak economy and the benign rate of inflation, we believe that the ECB will not hike rates until late this year. Likewise, the Bank of England likely will refrain from tightening until the second half of the year because the British economy is only now emerging slowly from its six quarter slump.
Global Recovery Has Continued into 2010
As we have written previously, the global economy endured its deepest recession in decades during the last two years. Between the peak in February 2008 and the trough in March 2009, industrial production (IP) in the 30 economies that comprise the Organization for Economic Cooperation and Development (OECD) - essentially the 30 most advanced economies in the world - plunged 18 percent. Through October, IP in the OECD countries had bounced back only 5 percent, leaving it 14 percent below its pre-recession peak (see graph on front page). That said, the global economy is growing again, and it is unrealistic to expect it to immediately climb out of the deep hole into which it fell in the aftermath of the global financial meltdown. Moreover, purchasing managers' indices suggest that the manufacturing and service sectors in most economies continued to expand through the rest of the fourth quarter.
Asia appears to be the strongest economic region of the world at present. For example, growth in Chinese IP has come roaring back (bottom chart). Not only did most Asian governments respond to the financial crisis with large fiscal stimulus programs, but the financial systems of most Asian economies did not blow up in the autumn of 2008 because they were not highly levered at that time. Therefore, bank lending in most countries in the region has remained fairly strong.
Growth has also returned to many South American economies as well. In Brazil, IP in the October-November period was up 3.8 percent (not annualized) relative to the third quarter, which in turn had shot up 4.8 percent relative to the second quarter. The Central Bank of Chile's economic activity index, which is a close proxy for GDP growth, was up 3.1 percent on a year-ago basis in November.
In contrast, growth in Europe has not been as strong. In the Euro-zone, the sequential rate of real GDP growth in the third quarter printed at 0.4 percent (not annualized), and the purchasing managers' indices suggest that growth remained positive in the fourth quarter. However, “hard” data have been less encouraging. Industrial orders in the overall euro area were flat on balance between July and October, and lackluster orders have translated into softness in IP. Part of the problem with euro-area production reflects sluggish consumer spending (bottom chart). Indeed, the volume of retail sales in the Euro-zone has not yet broken the downward trend that has been in place since May 2008. Greece has endured a horrific 20 percent drop in real retail sales over that period.
Monetary Tightening Will Not Be Synchronous
As the global economy crawls further out of its hole, it is natural to ask when central banks will begin to take back the extraordinary amount of stimulus they applied in late 2008 and early 2009 to keep the global financial system from imploding. Actually, some central banks have already begun to tighten policy. For example, the Norwegian central bank has lifted its main policy rate by 50 bps since late October, and the Reserve Bank of Australia has hiked rates by 75 bps. Given the underlying strength of most Asian economies, central banks in the region will tighten policy sooner or later. Because inflation rates in some Asian countries are beginning to creep higher again, we look for tightening cycles to commence over the next few months.
However, we maintain that it will be some time - probably late this year - before the European Central Bank contemplates a rate hike. As noted above, economic activity in the euro area remains weak, and the core rate of CPI inflation has declined to a nine-year low of only 1.0 percent. Likewise, the Bank of England likely will refrain from tightening until the second half of the year because the British economy is only now emerging slowly from its six quarter slump.
Wachovia Corporation
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