November/December  2009 VOL. 2

2010 Global Economic Forecast:
Better than ’09, but still not good

At the G-20 meeting in Pittsburgh, Penn., last September, leaders representing 90 percent of the global economy agreed to continue fiscal and monetary help for as long as it takes to put the world back on a positive growth path.

The help these countries have already provided has begun to put the global economy back on its feet, although the first few steps have been shaky indeed, according to experts.

“Most economists were shocked at the depth, breadth and length of this downturn,” says Jon Southard, principal of CBRE Econometric Advisors. “We shouldn’t forget just how awful things were.”

Asia’s emerging markets are leading the recovery, while the Euro Zone and the United States remain weak, primarily because of a lack of consumer support and rising unemployment. “For the first time, the emergence from global recession is being driven by emerging markets rather than the U.S. consumer,” according to Matt Robinson, an economist with Moody’s Economy.com.

Overall, world output, after falling by a record 2.4 percent in 2009, will only increase by a limited 2 percent in 2010. In this, the production outlook is less promising for the developed countries (+0.9 percent, after -3.8 percent in 2009) than for the emerging countries (+4 percent, after +0.3 percent in 2009). World trade should similarly increase by 3.5 percent in 2010, after falling by 12 percent in 2009.

“If you look at overall economic development around the world, quite a few pockets have turned around and are doing quite well,” says Dr. Fariborz Ghadar, director of Pennsylvania State University’s Center for Global Business Studies in State College, Penn.

Economy.com projects that growth in developed countries will gradually gather speed through 2010 and pick up the pace the following year. In its initial phase, the recovery will be jobless at best; at worst, it will be a job-loss recovery as employers wait to make hiring decisions until they are confident the recovery is more than a mirage. Economists forecast that hiring will pick up during the latter half of 2010 and accelerate in 2011.

Although leading indicators across the globe all affirm a definitive turnaround after eight quarters of misery, the recovery is still not on solid footing. In fact, it is quite fragile, and the chances of a relapse remain high, given the barely recuperating state of the global economy.

Unfortunately, a “W”-shaped recession cannot be ruled out if consumer confidence fails to rebound, according to Economy.com. A continuation of global expansion policy may become necessary beyond 2010 if consumer demand in the West fails to revive.

“Growth in Asia’s emerging economies will account for most of the global growth forecast for this year and next,” Robinson says. “While the key issue for the rest of the world remains when growth will return, the key question in Asia is how sustainable is the current growth in emerging markets.”

Regardless of Asia’s strength, David Levy, director and chairman of the Jerome Levy Forecasting Center in Mount Kisco, N.Y., doesn’t believe the weak signs of recovery are sustainable. “I do not think next year will be a good year,” he says. “The expansion may last until the middle of next year, but it will start to run out of gas in early 2010. Depending on what happens with fiscal policy, things will remain difficult for both the U.S. and Europe.”

In fact, Levy doesn’t believe the U.S. will see a period of sustained growth for another decade—until 2020. “By and large, we are going to have more up and down business cycles instead of sustained prosperity,” he warns.

United States

The U.S. government’s massive fiscal stimulus and über-aggressive monetary policy is showing results. After four quarters of contraction, the economy grew at 3.5 percent in the third quarter of 2009.

“A recovery has begun, but the transition to a self-sustaining expansion will be less than graceful,” says Mark Zandi, head economist at Economy.com, adding that GDP appears to be on track to rise nearly 3 percent in the fourth quarter of 2009.

“The recession is over for economists,” Southard notes, “but, for the average person, it probably doesn’t feel like it.”

Southard says the U.S. is experiencing a “U-shaped” recovery—meaning that the economy improves slightly and bounces along at the first turn of the U for several months before making the final turn toward economic expansion. “We have rounded the first bend of the U in many areas and the next step is for things to turn up,” he notes.

However, businesses still need time to grow confident about expansion. Hiring remains dormant, and while layoffs have slowed, they remain high. The unemployment rate reached double digits (10.2 percent in October 2009) even as the overall labor force shrank—something that is rare, although not unprecedented.

Zandi says it is possible that firms will resume hiring soon. In fact, employment growth historically lags a pickup in GDP by several quarters coming out of recessions. The increase in temporary jobs in October was a positive sign that more full-time hiring may be coming. Moreover, the U.S. government is expected to hire 800,000 temporary employees to conduct the 2010 census.

However, other leading job market indicators are less encouraging. While productivity showed marked increases during the third quarter of 2009, the number of hours worked per week remains stuck at a record low, and the number of people working part time because they cannot find full-time jobs is rising. Businesses are sure to increase hours for existing workers before hiring more.

“Given what businesses have been through, the lag between GDP growth and job creation could take longer in this cycle,” Zandi notes. The economy’s potential long-run growth rate is currently estimated at 2.75 percent, which implies unemployment will rise through at least next summer. The unemployment rate is expected to peak at 10.7 percent in the third quarter of 2010.

The federal government is expected to provide just enough additional support in the coming year to ensure the economy does not slide back into recession. For example, economists expect that the federal-funds rate target will remain effectively zero throughout 2010 and that more than $100 billion more in tax cuts and additional spending will occur.

It is likely that economic growth will be somewhat subdued through 2011, since it appears that the U.S. consumer has now turned frugal, spending less than he earns. “Once we get our debt structure down and get the residential problem resolved, consumers will start spending again—it will probably take 18 months,” Ghadar says.

In the meantime, the rest of the world is helping the U.S. emerge from the recession, Ghadar says. “When they start spending money domestically—building roads and flying people around—then they start buying American product like Caterpillar and then iPhones,” he explains.

Euro Zone

In September 2009, the Euro Zone exited its longest and most severe economic contraction since its inception, but economists worry there is still weakness that will continue into 2010.

Economy.com expects that the Euro Zone will grow around 1 percent in 2010, following a contraction of about 4 percent this year. Unemployment will rise into 2010, as labor markets typically follow the economic cycle with a lag, which will weigh on services.

“The Euro Zone’s downturn bottomed out in the first half of the year, and the area is set for fragile growth in the coming months,” says Andrea Appeddu, an economist with Economy.com based in London. That fragility is evidenced by the uncertainty in economist forecasts, which range from 2.7 percent to -0.1 percent for 2010.

Euro Zone governments have injected massive amounts of money into their economies over the past 12 months. Most of the economic improvement has been driven by this government stimulus, according to economists.

The region’s GDP grew by 0.4 percent during the third quarter of 2009, and five of the area’s six largest economies expanded during that period. Moody’s Economy.com expects that growth to continue but remain weak in coming quarters as manufacturing and services remain under pressure.

The United Kingdom is the major anomaly in Europe. With a downturn similar in severity and shape to that of the U.S., the U.K.’s recession started as a collapse in housing and related securities, followed by a dive in consumer confidence and spending.

Although the stimulus provided in the U.K. was anemic compared with that offered in the U.S., Britain is nonetheless on the mend. Even the financial sector has picked up, although some proposed financial regulations are controversial, according to economists. Moreover, U.K. housing may take longer to revive than housing in the U.S. because the British market is not as deep.

Meanwhile, preliminary data for Italy, the Netherlands and Belgium show that the third, fifth and sixth largest Euro Zone economies also resumed growing in the third quarter, while Germany and France continued to expand. Spain continued to contract due to its depressed property market and skyrocketing unemployment, which has reached nearly 20 percent, according to Euler Hermes, a global risk management firm.
 
The Baltic nations, among the worst hit in Eastern Europe, are crawling out of the holes they dug. The worst is over for them, thanks to generous and aggressive action by the European Central Bank. However, this downturn has caused some people to question whether these smaller countries can actually survive on their own.

Future economic recovery across the Euro Zone will be tied to business and consumer confidence, according to Appeddu. Recently, the Euro Zone economic confidence index reached a 13-month high—close to levels just before the investment bank Lehman Brothers collapsed. Sentiment has been on the rise in all three key areas of the economy: consumer, industry and services.

Appeddu says several factors support household confidence, namely fears of a collapse in output and mass layoffs that have been eased by government policies to cushion the recession’s blow.
Policies to stem joblessness may also be having an effect.

Unemployment numbers in the region during the last few months have generally been lower than expected, in part because of new programs that allow workers to put in fewer hours while the authorities subsidize their pay. In Germany, for example, the program helped lower unemployment from its July peak of 8.3 percent to 8.1 percent in October.

Meanwhile, business sentiment across the Euro Zone was boosted by the release of U.S. third-quarter GDP and the recent quarterly bulletin by the European Central Bank that showed credit conditions slowly easing. However, the continued strengthening of the Euro against the U.S. dollar could derail recovery.

Asia

Emerging markets in Asia have been buoyed by aggressive policy stimulus measures. China, India, Indonesia and Vietnam—the core of emerging Asia—all avoided recession, despite the severity of the global downturn and the sharp decline in exports.

Both China and India have regained traction, according to Economy.com’s Robinson. China’s annualized growth rate has recovered to around the 10 percent mark, buoyed by the government’s 4 trillion yuan ($586 billion) stimulus package.

Quarter-on-quarter growth in Indonesia has returned to pre-crisis levels, with non seasonally adjusted third-quarter GDP expanding a massive 3.9 percent. Vietnam appears to be on track to exceed its relatively ambitious 5 percent growth rate for 2009, while India continues to accelerate after its trough in the fourth quarter of 2008.

Consumer and business sentiment is buoyant throughout most of Asia, according to a survey conducted by The Nielsen Company. In general, Asian consumers don’t have the debt overhang that their U.S. and European counterparts do, so instead of saving their stimulus money or using it to pay off debts, they’ve spent it.

Similarly, Asian businesses aren’t weighed down to the same extent by balance sheet issues that firms in the developed world are, and credit flows were not interrupted to the same extent, allowing them to take advantage of lower borrowing costs.

Infrastructure investment has also been a primary growth driver in emerging Asia. Expenditures on roads, railways, ports, construction and electricity infrastructure have generated broader economic activity through the multiplier effect.

China’s economy is forecast to expand by 8.1 percent in 2009 and 8.9 percent in 2010. India’s economy is expected to grow 6.2 percent this year and accelerate to 7.4 percent in 2010. Indonesia’s economy will grow slightly more than 4 percent in 2009 and around 5.5 percent next year, while the Vietnamese government has a target above 6 percent for next year after 5 percent this year, according to Economy.com.

China’s economic expansion has helped its neighbors emerge from the recession quickly. South Korea, Japan and Australia are the biggest beneficiaries of China’s expansionary policy. For example, the turnaround in Australia was so rapid that it became the first country in the G-20 to tighten monetary policy since the global recession began.

However, there are concerns that China’s growth so far is fueled by government investment, and its fiscal stimulus may become a permanent feature unless the government restructures in favor of private consumption.

For example, private consumption as a percentage of GDP has declined steadily in China, now standing at 35 percent, which is half the typical share in a diversified Western economy. Growth in wages and salaries, the lifeblood of private consumption, has been significantly slower than growth in corporate income.

Moreover, external demand has yet to rebound, and the Asian growth model remains heavily dependent on external demand. As the global economy has started to stabilize, exports in the region have shown tentative signs of recovery.

However, full recovery relies on key export markets, and U.S. and European demand remains depressed. Initial forecasts indicate Western consumer demand will remain limited in coming years, meaning the traditional export-oriented growth model is becoming increasingly obsolete.

Overall, this is perhaps the greatest uncertainty regarding the sustainability of emerging Asia’s recovery, according to Robinson.