-
Rebound. The global economy has clearly returned to a growth path. The expansion could even be pretty robust in the second half of this year. The recession in the US, for example, probably ended in August (see chart below).
-
US. For the current quarter, we expect US growth at an annual rate of 3¾%. But what is still missing for a self-sustaining upswing is the support of private consumption. For that reason, the pace of growth will slow again to a meager ½% by mid-2010 before accelerating again towards the end of next year – a W-shaped recovery par excellence (pages 3-5).
-
EMU. We expect a similar, albeit clearly weaker, pattern for the euro zone. In the current half year, real GDP will grow at an annual rate of roughly 1%, before the EMU pace of growth halves, too. The end of the government economic stimulus programs and fading impulses from the inventory cycle will be a major drag (pages 6-7).
-
Strain. But what concerns us most is the credit cycle. Lending will continue to decline until well into next year. That should hurt primarily investment activity. At best, it should have stabilized by the middle of next year. The government-fed, export-driven recovery is therefore not expected to make the jump to private final demand. The upswing aborts again as seen already in 2002 and 2004 (pages 8-9).
-
Central banks. The Fed and above all the ECB can therefore probably take their time before tugging on the interest rate reins again – provided the economic recovery up to the beginning of 2010 does not surprise strongly on the upside! But even this time-window would close again rapidly.
-
Further topics:
– Weekly Comment: Lessons from the crisis (page 2).
– 2009 Oktoberfest: Party spirit despite crisis (page 10).
– Date outlook: Ifo business climate continues to improve (page 12).
– Market outlook: EUR well supported; bonds under pressure (page 19).
Lessons from the crisis
Keeping their fingers crossed, analysts and policymakers are now busy assessing the resilience of the economic recovery (or lack thereof), and looking back at the collapse of Lehman Brothers exactly a year ago to see what lessons should be learnt. One thought on Lehman: perhaps the first lesson to learn is, once again, that we all need to be more humble. In retrospect, today everybody seems to agree that it was a disastrous mistake, and that it was obvious that allowing Lehman to fail would have wreaked havoc on financial markets. But if it truly had been obvious that allowing Lehman to fail would have triggered apocalyptic consequences, the banks would not have been allowed to fail – as indeed no major/majorly interconnected financial institution has been allowed to go under since then. The truth is that at the time many were harshly criticizing the going trend of “bailing out” any and all institutions in trouble, and “moral hazard” still featured prominently in the debate. Recognizing how much we did not know/see then could be a good first step to avoid equivalent mistakes in the future.
Looking at the recovery, on the other hand, shows us instead the benefit of learning from previous mistakes – and not just because policymakers have been making it clear that they intend to keep supportive policies in place, determined to avoid repeating the premature tightening enacted by Japan in the late 1990s. The most positive surprise in the recovery so far has been the quick revival of global trade. In the depth of the crisis, one of the most serious concerns was a resurgence of protectionist pressures. Everything seemed to point in that direction: discussions on global imbalances provided fertile ground for international finger-pointing, international cooperation on the policy response was late and somewhat reluctant, and the balance of power clearly tilted back to national governments which were quickly feeling the need to provide reassurance and jobs to their domestic constituencies. At some point a statement by US Treasury Secretary Geithner seemed to openly label China as a currency manipulator, which would have been the equivalent of pushing the red button on the nuclear launch pad. The WTO went into overdrive, and together with the IMF tried to remind everyone that protectionism played a major role in exacerbating the Great Depression.
Yet a year later, we see that global trade has picked up already, and net exports have turned into the main driver of the euro zone’s recovery: in 2Q, net exports contributed 0.7 percentage points to euro zone growth, and a whopping 1.6 percentage points to German growth. At the moment, demand comes mostly from Asia, where China is leading a very rapid and robust rebound in growth, supporting especially demand for commodities and investment goods. I have noted in the past that the share of euro zone and German exports going to China has a much smaller weight than trade intra-Europe, including the UK and the new member states of central and Eastern Europe, and therefore cannot suffice to power the euro zone’s economy at a robust pace over a prolonged period. In the short term though, the strong impulse coming from Asia is definitely enough to push the turnaround and make the difference between a deep contraction and a stabilization of moderate growth, as was the case in the previous quarter. In the next few quarters, we still expect net exports to make an important contribution to the euro zone’s recovery. This, incidentally, could also bring to a quick conclusion the internal debate and soul-searching on the adequacy of Germany’s export-oriented model—although international discussions and pressures linked to the global imbalance problem will continue.
How did we manage to avoid the risk of a protectionist lapse that would have killed any recovery hopes and condemned the world economy to an even more prolonged contraction? In part, as I mentioned above, it is the fact that policymakers were keenly aware of the disastrous impact of past protectionist surges and this, combined with the precious coordinating role of more robust and tested international institutions than we had in the 1930s, allowed governments to resist this particular temptation. Looked at it this way, this is important testimony to the value of the current international financial framework, that, while often vilified, has allowed us to keep protectionism in check and, through the IMF, has quickly stabilized emerging markets as they began to be affected by the crisis. But there is more to the story: what we see at work is in part the positive side of globalization. While the increased and irreversible interconnection of financial markets has allowed the financial crisis to spread at an unforeseen and frightening speed, at the same time the interconnection of the global real economy has probably generated some important, self-regulating safeguards. Governments considering the introduction of heavy protectionist measures have had to consider the adverse impact these would have inflicted on domestic companies relying on important outsourced operations or on key export markets. Through globalization, in other words, free trade probably created its own constituencies, its own vested interests that helped counterbalance protectionist tendencies.
This is another important lesson to take home: integrated financial markets certainly require better regulation and stronger safeguards, but we have to accept that globalization is here to stay, that it has a self-sustaining dynamic, and that it can be a powerful and precious source of growth.
