Finding a road to recovery for the global economy
16 March 2009
Barring any further financial shocks, the global recession could end in late 2009. However, the world economy still faces at least another eighteen months of below trend growth, according to analysis published today by leading investment house, Standard Life Investments.
In the latest edition of Global Perspective, its monthly investment view, Standard Life Investments examines the particular problems facing the global economy and how growth could be restored. As the policy stimulus has been considerable, various triggers are analysed which will confirm whether the recession is coming to an end.
Douglas Roberts, Senior International Economist at Standard Life Investments, said:
"The recession began in the US back in Q4 2007, and correcting the various imbalances remains of considerable importance. So far, the economy shows few signs of bottoming, with unemployment levels rising rapidly, new orders falling and consumers retrenching. However, there have been some helpful adjustments, for example in terms of excess inventories starting to be brought under control. All this suggests that the worst of the contraction could be seen this spring, albeit stabilisation will take the remainder of this year. It is important to note that the US is not nearly as vulnerable to the slowdown in global trade as other economies. The US has also introduced a meaningful fiscal stimulus package. This has its limitations, but it should add around 1% to GDP this year and next; nevertheless, GDP will still contract at least 2% in 2009 and only modest growth of some 2% is expected in 2010.
"The fiscal and monetary steps being taken in the US must be seen alongside the measures introduced in many other countries. Central banks have lowered interest rates close to zero, and are considering what further measures they can take to restore the flow of credit. One example is quantitative easing policies aimed at increasing money supply growth, reducing interest rates and stimulating economic growth. Lastly, the IMF has estimated that the succession of fiscal stimulus packages amounts to about 2-3% of global GDP, although even sums of this size only provide limited cushion to the downside in current circumstances.
"Barring any further financial shocks, the global recession should end in late 2009. However, our House View warns that the global economy faces at least another eighteen months of below trend growth. Debt de-leveraging takes time; the loss of financial wealth has been considerable, and unemployment will remain historically high well into 2011. The economic environment is not supportive for those economies most dependent on overseas trade. Policy options are limited for such economies, except for engineering a major depreciation of their currencies. Given the synchronised nature of the downturn, and the inter-dependency of the global economy, it will be essential for countries to work together. A drift towards barriers hindering the free flow of capital, goods or labour would be a worrying development.
"The triggers for the eventual upturn will be a resolution to housing market problems, especially in the US but also other economies, and a return to an effectively functioning financial system. Just how quickly these can be resolved will determine how quickly the global economy will return to health. The good news is that the authorities seem, at last, to be cognisant of the severity of the challenge that they face, and are responding in kind. Specific triggers to examine in our Focus on Change process include the detailed housing data and the manufacturing cycle, but also for example the senior loan officers surveys showing willingness to lend and borrow."
