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Sunday, October 18, 2009

Is the global recession ending for 2009 and will 2010 be any better?

The IMF in a recent statement that the crisis is over, the worse is behind us, recovery is seen and the best is yet to come. Quoting the IMF in their World Economic Report in October, 2009 explicitly stated in the first chapter titled "The Global Recession is ending".

That may be true in some instances, but there is still very much to be done and perhaps, sadly, little than can be done to save much.

In light of this, can we expect a better 2010 in The Caribbean and larger developing world, in any event? It all depends on what other larger countries do and how much leeway we have with expanding interests past the traditional positions, if there is the notion of continued dependence on larger economies to lead the charge.

I remember one of my very first articles back at the end of 2008. It stated that the global economy would begin to rebound by Q3 this year. To some extent, I was correct, albeit that the rebound was not as upbeat as one would have read into my analysis and the growth is being led by Asia at large- China and South East Asia to be exact- as opposed to the traditional Triad (EU, USA and Japan).

Let's take a deeper look at some of the issues analysts have been looking at to gauge their outlook: manufacturing, retail sales and consumer confidence.

Led primarily by Asian markets, manufacturing has rebounded with little or no pick up in the USA or in Europe. The US G.19 Report over the last year has stabilized to lower production and expectations, to some 20% below that of 2006 and 2007. In Europe, the details are slightly more encouraging, due to the issue that emerging economies in the post soviet bloc's are still developing and commodities such as oil, coal and car manufacturing, are experiencing steady growth.

Coming into the end of the year, as it relates to consumer confidence indexes broadly, analysts are predicting that sales will experience an uptick due to the Christmas season. Retail sales have been coming along slowly, thanks’ to the cash for clunkers exercise in the USA and welfare programs in the USA and Europe; i.e., stimulus checks in the USA and added welfare spending in most of Europe as well as VAT relaxation.

However, are these issues primarily linked to the larger issues with the economy and recovery? Also, will this compendium of criterion, moving forward, be less or more affected by other conditions that impact them all? Should there be any real concern that after the Christmas season, consumer confidence will see comparable seasonal inclines?

To be fair, the USA and Europe are still not producing as much or as fast. Corporate defaults are at an all time high in Europe and are to be at a sustained default level, going into 2011 as well as into 2012 by some of the more dire predictions.

American production is up, but production volume is down. While also, job cuts, having worked to increase productivity levels by 10% to 15%.

For one, the issue of employment prospects and current employment rates is first and foremost.

The US just cut nearly 200 thousand private sector jobs in November, which was stated as the smallest job cut over a month period since 2008.

In Europe, The Employment in Europe report forms the analytical basis for the Joint Employment Report (JER) is slated to be out by December 9th, 2009. But, from the onset of the crisis, over 4 million.

Additionally, due to Europe's fervor for regulation, more private sector jobs are slated to be lost. Particularly with regulation in the financial services sector as well as regulation vis a vis carbon policy.

Reports up to April, 2009 from the International Labor Organization (ILO), also has global employment significantly down at -1.3%. This means that job growth has not only receded, but permanent jobs may have been lost across Europe and America, with modest gains in North Africa/Middle East and in East Asia.

In my estimation, the jobs lost over this recession, will never return to the traditional, real sectors of the developed markets the way it has been in the past in the USA and established Europe.

Higher technology, coupled with the uncertainty of the outlooks which are prompting managers to maintain labor costs, while reaping profits at the margins due to the higher productivity, will see to that.

It is up to, in turn, developing and emerging market countries to create traditional sector jobs to sustain growth into, what I would term, developed market economies “funking out".

Secondly, the issue of increased investment, particularly led by private equity is another issue to monitor for progress.

The reason why private equity should be monitored is because private equity is what was driving the market, pre crisis. In 2008, private equity fell by 40% over the previous year, directly correlated with recessionary economic growth, with no signs of increased activity as it relates to mergers and acquisitions, or improved conditions in large firms outside of high technology.

The worst of it with private equity is that as long as asset pricing remains unstable and the issue of market/mark to market evaluation remains uncertain, private equity will remain silent, if all circumstances remain constant over the short to medium term.

More importantly, and particularly with regard to the causes of this current crisis turned economic recession, the issues of a) credit flows and b) deflation due to conditions that can be described as an aggressive bear market, for not only stocks, but also for companies in distress, is also of importance.

The IMF does assert in the WEO that credit has started to flow and spreads have come down. That is somewhat good news, but expectations on lending conditions, as of July this year, are still down considerably.

There has been some movement in the Asian markets with regard to stock activity, but to the level where they were in 2006-07 is still yet to materialize. In fact, may never rebound.

Deflationary pressure is still a major concern, as it appears as if, while manufacturing is stable, purchases are down and output productivity has increased with minor layoffs.

To highlight for a moment of how we got here, the chain reaction of bad events started when credit stopped flowing through the banking sector, simultaneously with the decline in private equity activity, due mostly because major investors lost confidence in the system that was corrupted by risky assets- mortgage backed securities and collateralized debt obligations- where the risks were severely under appreciated.

Particularly, the market for housing backed securities, became detrimentally unstable due to the deteriorating economic conditions in America which, among other things, caused for houses to be "turned upside down" and equally, adjustable rates for low cost homes that were once very low in order to attract middle to low income families, were raised at a time of considerably high real inflation cost which caused massive defaults in mortgages- the price of gasoline and processed food, saw record prices in the years between 2004 to 2008, that had risen from $27.00 to $91.00 (USD) for oil and with the weighted average export shares of total food for 2002 to 2009 from 90.2 to 146.9 with the peak in 2008 to 190.9, as reported by the FAO's in their global food price index.

Currently, The Case-Shiller housing price index (HPI) state that are at -13% of what they were last year this time and -50% from their peak in 2006-2007 in the USA. The Financial Times (FT) HPI in the Eurozone is down for past 7 quarters leading up to Q1, 2009, with negative digit decreases steepening from Q1, 2008 to Q1, 2009 to -4.5%.

The key issue with all said previously, is that the regulatory regime and the way investment banks are allowed to do business, still has not changed. Not only does this indicate that disaster can strike again, but also if growth is to be led through the virtue of these windows, with lower employment and manufacturing prospects, in conjunction with the still uncertain nature of the very system that collapsed- let alone the uncertainty about impending regulations- there is nothing to suggest that robust growth is to be expected.

In another vein, while the Asian housing market was red hot throughout most of the 2000's leading into 2009, the reports for 2009 are allot less stated- which is quite concerning when leading institutions, are touting the Asian led recovery for the global economy. Examining national statistics on the residential market is still red hot in China, with a 17% year over increase in overall household investment and 13% year over increase in residential property and for commercial property there was a 73% rate of sales increase.

Figures throughout Asia are pretty modest compared with China, but one must take into consideration the issue with respect to sovereign national investment in housing in the socialist state, coupled with national savings surpluses and balance of payment surpluses, to fund the Chinese market during the downturn, in addition to the stimulus plan they introduced in 2008.

Let's all hope Asia does not follow the western model of economic management to a tee. Even though Asian officials have chastised western officials for their management, the fact of the matter is that they learned the tools and templates for economic management from western schools of thought.

Nevertheless, when we factor in the savings rates before the crisis started for Asia, it is not difficult to believe that spending, at least, in the region, will be higher than other continental markets with regard to home prices.

Overall, the major issue with regard to economic growth, globally, is who will there be growth for?

So, the recession is ending for some people. Asia seems to have never had a recession, let alone still in one. But, the recession is certainly not ending for many of us out there.

However, emerging and developing markets must take advantage of the permanent jobs losses and continue to develop nationally the traditional way, until they have "caught up" to developed markets- where ever that may end up.
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