Will The Global Recovery Take Hold in 2010?

2010 is likely to be the year of the global recovery. Thanks to the coordinated, sizeable and successful global policy stimulus, the world economy is entering 2010 in what appears to be the very early stages of the recovery. Across the globe, the outlook will depend on the interaction between economic fundamentals, regional fiscal/monetary policies, and ultimately, investor and consumer confidence. Although the underlying fundamentals are key, confidence is a vital issue and can be somewhat unpredictable. This was seen in 2H'09, when confidence in the financial sector rebounded significantly, helped by unprecedented policy stimulus. Previous economic recoveries have shown that confidence can surprise on the upside, as economies with stronger fundamentals, like China and India, could see stronger rebounds than in the West as we move through the year. While many economists point to the third quarter as the "official" end of the global recession, 2010 will start the year with concerns that the momentum achieved in 2H'09 will carry on into the new year, but unfortunately this recession isn't like the past and many questions remain.

The current recovery story appears to be driven by three main forces. First, the realization that the worst-case scenarios envisioned earlier in the year are now unlikely to materialize, which means the purchases by companies and consumers that have been put off during the worst of the crisis are now taking place. This should have a positive effect on producers of capital and durable consumer goods in particular. Second, working down inventories (de-stocking) is coming to an end, and companies are beginning to raise their inventory levels again. This could have a brief but powerful financial impact on quarter-to-quarter growth rates in the beginning of a recovery (2H'09), but should taper off dramatically in the first couple of quarters in 2010. Third, the massive fiscal and monetary stimulus that began in late 2008 has now been fully implemented in most of the major economies and many emerging markets. Differences in the extent to which these factors apply will be an important determinant for variation in the timing and shape of recoveries. Many Asian emerging markets have seen very large stimulus measures domestically, and are now benefiting from corresponding stimulus measures among their local trading partners. Given the specialization in the production of consumer durables, the Asian economies have also seen a particularly dramatic downturn during the height of the crisis. This is the reason that Asia is now benefiting more than others from normalization of global sentiment. By contrast, stimulus has been more moderate in Western Europe, with the result that the recovery has been slower in Euroland and the U.K.

The global economy is expected to grow by 2.5 percent in 2010 as compared to the contraction of 1.9 percent in 2009. While this would represent a modest recovery overall, Asian growth by contrast should accelerate to nearly 7.0 percent from 4.5 percent in 2009. Inflation is not expected to be a major problem, staying low in the West, but in some emerging economies where domestic demand is expected to be stronger and where asset prices have risen significantly, central banks are expected to tighten monetary policy to keep a lid on inflation.

What shape will the recovery take? A "double-dip" recession would require either an external shock, such as an event that could drive oil prices dramatically higher (like an escalation of tensions in the Middle East) or a policy-induced shock triggered by a premature policy tightening in the West. A bigger issue for the U.S. and Europe next year will be the extent of the recovery via private investment. This, of course, is linked to confidence. If small and medium-sized companies have better access to funds, it will be a major positive, as such firms are more likely to invest capital at home. Larger firms, on the other hand, have enjoyed better access to funding this year and will likely focus on faster-growing markets across the emerging market spectrum. This behavior firmly points to a jobless recovery in the West, where employment growth is projected to be slow at best. Europe will not assume the U.S. model, and in 2010 the smaller European economies will likely come to terms with the competitive challenges of the firm euro and the aftermath of the recent economic bust. Contagion from Central and Eastern Europe will be felt as stagflation as that region will impact both exports and parts of the Western European banking sector. Germany, given its massive export machine, looks to enjoy a steady recovery. The U.K. faces the biggest challenge, with the tightening of fiscal policy likely to be offset by continued low interest rates and an expensive pound. The excess capacity as reported by Japanese companies recently in the Tankan Survey of corporate sentiment by the Bank of Japan signals the country's vulnerability to deflation. The softening labor market in Japan also reinforces the anticipated weak rebound in private consumption. Adding to Japan's pain is the strength of the yen, which is contributing to deflationary pressures, as well as undermining the competitiveness of Japanese manufacturers. Companies will have little incentive to invest if the outlook for profitability does not improve and capacity utilization rates remain low.

Despite the prospect of a return to positive growth on a global basis, 2010 concerns about the durability of the recovery will persist, given the uncertain outlook for exports, the continued weak labor markets and the inevitable temporary nature of fiscal stimulus measures running their course toward the end of the year.


The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.


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