Global Economic Recovery - Are We There Yet?

Analysts are now revising upward their growth estimates, suggesting that the contraction of growth will be slightly less severe than was expected in February and March. However, they remain divided about whether the recovery will begin in the latter half of 2009 or be delayed until 2010. Consensus now suggests that the U.S. economy might bottom in H2 2009 and that Chinese acceleration in H2 2009 could be more pronounced. The outlook remains weak for Europe and Japan. However growth may be well below potential in 2010.

• IMF (July): The global economy is beginning to emerge from the recession "but stabilization is uneven and the recovery is expected to be sluggish." Economic growth may be 0.5 percentage points higher than projected in April 2009 or a 1.4% contraction in 2009 and 2.5% growth in 2010. Advanced economies will contract by 3.8% in 2009 - the U.S. by 2.4% (slightly less than in April), eurozone by 4.8%, Japan by 6%, UK by 4.3%, Canada by 2.3%. Eurozone will continue to contract in 2010 (0.3) while U.S. (0.6%) Canada (1.4), Japan (1.7%) and UK (0.2%) have below potential growth
• IMF: Emerging markets will slow sharply, growing by only 1.5% in 2009 before rebounding to 4.7% in 2010 (lower than the 6% in 2008). China to grow 7.5% in 2009 (8.5% in 2010) India 5.4% (6.5%). Asean to contract by 0.3% in 2009 before growing 3.7%) Latin America (-2.6), Eastern Europe (-5) and CIS (-5.8) to all face contractions in 2009 and sluggish growth in 2010 while the Middle east grows only 2%
• OECD (June): now expects a 4.1% contraction in the OECD area for 2009 (from the 4.3% expected in March) followed by a 0.7% growth in 2010. Thanks to a strong economic policy effort, OECD activity now looks to be approaching its nadir but the ensuing recovery is likely to be both weak and fragile. Recovery will take hold in a staggered manner across countries, reflecting differential policy stimulus and the force of headwinds from balance sheet vulnerabilities. A recovery appears to be in motion in most large non-OECD countries. The U.S. may bottom in H2 2009 and show marginally positive growth (as will Japan). Signs of impending recovery in the euro area are not yet as clearly visible and recovery may be sluggish.
• World Bank (June): Global GDP, after falling by a record 2.9% in 2009, is expected to recover by a modest 2.0% 2010 and by 3.2% in 2011 as banking sector consolidation, continuing negative wealth effects, elevated unemployment rates, and risk aversion are expected to weigh on demand throughout the forecast period. Despite higher growth rates in developing countries (given stronger underlying productivity and population growth), output will remain subdued. Given output losses to date—and because GDP will reach its potential growth rate only by 2011—the output gap (the gap between actual GDP and its potential), unemployment, and disinflationary pressures are projected to build over 2009 to 2011.
• UN (May): The world economy (World Global Product) is expected to shrink by 2.6% in 2009 after a nearly 4% annual increase in 2004-2007. Despite an expected recovery (1.2% growth) in 2010, risks are on the downside in 2010. World income per capita is expected to decline by 3.7% in 2009. In a more optimistic scenario, in which the financial and credit markets are healed in 2009, world GDP could rise 2.3% in 2010.
• In April's World Economic Outlook, the IMF forecasts that real global economic activity will contract by 1.3% in 2009 (1.8ppts lower than January's 0.5% growth prediction and 3ppts lower than in November 2008) before staging a modest recovery in 2010. In June (Reuters) it reportedly raised its forecast, suggesting global growth of 2.4% (up from 1.9% in 2010).
• Citigroup: Recessions — in terms of declining GDP — are ending, or soon should, in many countries, and our growth forecasts have edged up in recent months in many regions. with low inflation, most major countries can afford to keep low interest rates and extensive unconventional stimulus in place for an extended period with the RBA being among the first to hike rates. Global growth is likely to contract by 2% in 2009 before increasing by 2.9% in 2010 (based on PPP weights)
• Signs of stabilization―though scattered and sometimes contradictory―have begun to emerge. However, it is still too early to say that a sustained recovery is imminent. Global industrial production is currently down about 13% over last year, and while it may rise in the coming months due to inventory correction, the future remains murky. GDP forecasts for 2009 are still being marked down to reflect a weaker-than-expected start to the year.
• BNP: A deeper and sharper inventory reduction, stabilization of financial confidence and policy actions may have helped bring about green shoots earlier than expected, but they may be transitory given that the countries that have had a mercantilist growth strategy have not sufficiently stimulated domestic demand to offset the hurt from falling exports.
• RGE Monitor (April): Global economic activity is expected to contract by 1.9% in 2009. Advanced economies are expected to contract 4% in 2009. Japan and the eurozone will suffer the sharpest downturns. U.S. GDP will continue to contract, albeit at a slower pace throughout 2009, with negative growth in every quarter. Emerging markets will slow down sharply from the stellar growth rates of the past few years, with the BRIC economies growing less than half their 2008 pace of 7.5%.
• Morgan Stanley: Massive global policy action has moved us further away from a Great Depression-type scenario, and the risks of contracting output and structural deflation have waned. Global output will probably start growing in 3Q09, with G10 output growth turning positive in 4Q. Growth for 2009 as a whole will stay firmly in negative territory for all regions except Asia excluding Japan (AXJ) (where China and India will keep growth in positive territory).
• The global economy remains weak across the board, with no significant signs of improvement. Moreover, growth in 2010 is not a foregone conclusion.
• Goldman: Growth in the emerging world may likely keep the global economy from contracting in 2009, but risks are tilted to the downside. The global economy may expand by about 1% y/y in 2009, down from about 3.2% in 2008. Most of that growth will come from Brazil, Russia, India and China as domestic demand growth will offset declining exports. China alone may contribute more than 60% to global growth in 2009
• Citi: The nadir for growth in most regions remains late this year with 1.7% global growth expected, with shallow recoveries expected in 2010. The deepening global recession is creating greater challenges to policy making. Markets will face more challenges to growth after the recession due to a rise in the cost of financial inter-mediation and the potential to draw the wrong lessons from the crisis.
• The global financial crisis is bringing an end to the vendor financing model, whereby excess consumption in the US was financed by a savings glut in the emerging world. The market will ensure this adjustment finally happens.

p/s photos: Michelle Yip Shuen

Why Even Produce Oil When Its Below $40 (Revised)

Click on the link to get the latest breakeven oil price for major oil exporting nations. We do feel sorry for them, don't we?!! Summary:

2008 breakeven px / 2009 breakeven px
Bahrain $75 / $84
Kuwait $33 / $34
Oman $77 / $78
Qatar $24 / $24
Saudi Arabia $49 / $54
UAE $23 / $24
Algeria $50 / $60
Azerbaijan $40 / $35
Iran $90 / $90
Iraq $111 / $94
Khazakst $59 / $67
Libya $47 / $53

http://www.cnbc.com/id/27355967/


Venezuela depends on oil revenue for half of its public spending and more than 90% of its exports. It is the largest exporter in the Western hemisphere. The budget for 2009 was based on the assumption that oil price would be at $60. Can Venezuela stop exporting now that oil is below $40? The country is too reliant on the revenues. It cannot stop exporting as that would mean 90% of export revenue will be gone. Though Venezuela's cost of production might be on the lower side of $25, but the country is already too dependent on oil revenues.

Major flaw, the government did not invest oil proceeds properly over the last 20 years. If they used the bulk of funds by investing into education, infrastructure and broadening FDI base - now they would have moved up the economic ladder already instead of being primitive drillers-exporters with limited value-add industries.

Its the similar story for many of the oil exporters. The following countries also have a very reliance on oil as a percentage of total exports (2007 figures):
Algeria 98.5%
Libya 97.5%
Nigeria 88.3%
Russia 48.8%
Kuwait 95%
Saudi Arabia 89%
UAE 50.8%

Although oil prices have plummeted to below $40, most OPEC countries are still OK with it as the sharp correction has been counterbalanced by a 30%-60% depreciation in their own currencies vis-a-vis the USD. 14 out of 24 fuel exporters (where fuel is 50% of GDP or more) have a conventional peg to the US dollar, seven oil exporters peg to a basket of currencies including the US dollar and the euro or have a managed float regime, usually de facto targeting the US dollar and the euro. Three oil exporters in the CFA franc zone peg to the euro.

There is also geopolitics consideration. Kuwait, Saudi Arabia and UAE are "friends" of the US and would be more or less influenced by the Americans global strategy. Low oil prices are needed to bring about some support to stave off a global recession.

On the other side - Iran, Russia, Venezuela and Libya would be more inclined to pursue differing political ambitions. They are also more inclined to use oil proceeds to further exert their influence on "weaker nations" so as to support regimes aligned to their own interests. Its a generalised statement but has more truth to it that it appears. Hence Saudi Arabia would be more interested to have a lower oil price for now, one to help the global economy, two, to lessen the monetary might of the Iran, Russia, Venezuela and Libya - ceteris paribus, the latter 4 countries would have things a lot tougher than say Saudi Arabia, UAE or Kuwait with presnt oil price levels. That is also why the "rogue nations" will always be clamouring for OPEC to cut production to boot oil prices. We should be thankful that we have Kuwait, UAE and Saudi Arabia on the side of democratic nations.

Iran has the second largest known conventional crude oil reserves in the world, and it has used them in the past four years as a political and economic weapon to defy and undermine the West while promoting its own agenda. Oil money helped Iran spread its influence in Iraq. Oil money helped it challenge Arab political dominance in the Middle East. Oil money helped spread its influence in Lebanon, through Hezbollah, and in the Israeli-Palestinian conflict, through Hamas. IMF has stated that Iran would face unsustainable deficits if price of oil falls below $75. Iran now has to contend with 30% inflation and its economic status is now extremely fragile. Suffice to say that its political influence has be halted and its domestic economy is crumbling fast.

Russia was still willing to use its vast energy reserves to try to reassert the dominance it lost with the Soviet Union’s collapse.

If you look at the breakeven price for most countries, they are operating at a loss. Oil might be more valuable to be kept in the ground for many of the nations whose breakeven is more than $50 - but they cannot just stop all production: one, exports of oil make up 80%-90% of all export proceeds; two, you still have a substantive number of workforce dependent on the oil industry; three, there have been a lot of sunk cost, infrastructure and supporting industries built around the oil industry in their respective countries, long term supply contracts, etc. - switching things off will basically decimate and destroy the economy. Arabia’s king noted that they need $75 a barrel oil in order to meet their budgets and in order to open up new fields. That’s an important comment since they are the largest of the OPEC countries. Qatar and Kuwait only need $55 a barrel oil. However, even that is still 38% above the current price of $40 a barrel. Hence oil below $40 would result in a massive cutbacks in expenditures, investments, curtailing of seeking new oil fields, going into massive budget deficits, or a combination of these cited effects. In other words, the depressed oil prices actually will see a lot less reinvestment into new oil fields which will come back to bite us a few years down the road.

p/s photos: Lynn Hung Doi Lum

Beijing's BYO To The Party

Beijing has unveiled a 4 trillion yuan (HK$4.54 trillion / US$582bn) economic stimulus package to help boost domestic demand - in what is seen as a shift to "proactive" fiscal and "moderately easing" monetary policies.

The measures, which run until the end of 2010, were announced after a meeting of the State Council chaired by Premier Wen Jiabao, Xinhua News Agency reported. Some 100 billion yuan (US$12.8bn) is earmarked for this quarter alone.

The spending will focus on 10 areas, including low-cost housing, infrastructure in rural areas, and social welfare, in addition to transport networks - railways, highways and airports - environmental protection and technical innovation.

It also includes capital expenditure to renew city power grids. Some of the spending overlaps longer-term stimulus plans reported earlier - including a 2 trillion yuan railway plan and 5 trillion yuan expenditure on roads, waterways and ports from 2006 to 2020.

BNP Paribas chief economist Chen Xingdong said: "This is the first time China has officially confirmed the shift to easing monetary and fiscal policies. Although it was a 'slow heating up process,' it shows the government's realization of the urgency to bolster economic growth." Economists have been anxiously waiting for a huge stimulus plan ever since gross domestic product growth slowed to 9 percent in the third quarter from 10.4 percent in the first half.

"At the Central Economic Work Conference, to be held later this month, Chinese leaders are expected to announce concrete measures to stimulate the economy ... Beijing's new policy drive of upgrading infrastructure, rural land reforms, and expansion of social welfare is akin to a 'New Deal' with Chinese characteristics," said Jing Ulrich, chairman of China equities at JPMorgan. China's economy grew at the slowest pace in five years in the three months through September as export orders shrank amid the global financial turmoil. Domestic industrial production also fell after Beijing ordered heavily polluting factories to shut down ahead of the Olympic Games in August.

The Cabinet also confirmed that reform of the value-added tax system will cut companies' tax bills by 120 billion yuan. Beijing will also remove credit limits of commercial banks to further encourage lending support to small and medium-sized enterprises. The People's Bank of China has cut interest rates three times since mid- September. People's Bank of China governor Zhou Xiaochuan, meanwhile, said the central bank forecasts the mainland economy to expand between 8 and 9 percent next year.

The success of this plan depends crucially on continued government credibility in the face of rapidly rising deficits as well as on the health and stability of the banking system.If the banking system can withstand a downturn without any significant rise in NPLs and without forced credit contraction, this may be the shot in the arm China and the world needs. This move by China is a very big hint of how worried the government is and how determined they are to address the issue that this plan was approved.

The government can force credit expansion by requiring the banks to lend more.

Certainly they are trying. Last week, after weeks of rumors that loan caps were being relaxed, the PBoC announced that they were junking the credit restrictions they had previously imposed on banks. But loan growth has still been very low.

This is hardly surprising. In such dire economic circumstances with global credit markets and liquidity seizing up, with domestic bankruptcies rising, with inventories and receivables also rising, it takes both brave banks and brave borrowers to accommodate credit expansion. Most good companies seem reluctant to borrow and anyway banks are reluctant to lend.

So what if policy-makers simply announce minimum loan growth targets for every bank? That should certainly cause an expansion in banks’ balance sheets. However, this will create some problems. It might not be effective in net credit creation for the country. If banks don’t want to lend but are forced to, we will see off-balance sheet transactions placed back on balance sheet and a much more rapid decline in loans from informal banks. That means that real credit expansion can still be negative even with minimum loan growth target enforced onto the banking system. Forced lending will also result in a sharp deterioration in quality of borrowers. It is always possible to find borrowers, even in a sharp economic contraction or investment crisis.

US$582bn is not a small sum, even if you spread it out over a few years. There is the multiplier effect or trickle down effects. The rule of thumb is that every one dollar spent is worth between 4-8 dollars in the real economy, velocity of money supply.

The sum announced by China is certainly very big. Is it big enough? The US GDP is about US$14 trillion or 3.5x China's GDP of US$4 trillion. Say US loses 2% of its GDP, to make it up, China would have to grow by a staggering 6.8% - of course, that's assuming the problem is just contained in the US, and that China is the only engine of growth left in the world. The other factor to bear in mind is that Chinese consumer only make up some 35% of China's GDP, much lower than US consumers. Final conclusion - its not a Prozac, but its better than nothing, a lot also depends on whether its for "show and tell" or will the measures be implemented assiduously.

p/s photos: Sammi Cheng