Macro Economics

Macro Economics

Overview

The world economy has stopped shrinking – Coming quarters could prove strong. Global economy: The International Monetary Fund is expecting a V-shaped recession with fairly quick recovery and positive quarterly growth figures in 2010. However, this is just one of

The world economy has stopped shrinking – Coming quarters could prove strong

Global economy:
The International Monetary Fund is expecting a V-shaped recession with fairly quick recovery and positive quarterly growth figures in 2010. However, this is just one of many scenarios. A “game of letters” has been the talk of the town lately – will the future growth picture form a V-shape or become a double-dip (so called W-shape) or even an L-shape?

In any event, the positive signs are beginning to outnumber the negative ones. Having said that, it is important to recognize that the recession is far from over and nobody really knows the extent of the damage done – or to come – to the global economy.

Source: IMF

The world economy has stopped shrinking. Optimists argue that the scale of the downturn calls for a strong rebound. Pessimists, meanwhile, think the downturn’s origins favour a weak recovery or a double-dip. Neither are exactly similar to earlier recessions, because today’s global slump combines several types of downturns and an unprecedented strong policy response. The scale of the collapse was broadened and deepened by the freezing up of the machinery of global finance, a dramatic collapse in confidence and stock-slashing. It was then countered with several economic stimuli packages. The shape of the recovery depends on how these forces interact.

Yet a rebound based on inventory adjustments is temporary in nature, and one based on government stimuli alone will not last. Hopefully, consumer demand will pick up in time to take over from government economic stimuli. Otherwise, a double-dip is likely to materialize.

Most Asian countries entered the downturn with much sounder budget finances than their western counterparts. In China, the easing of credit has probably been even more important than fiscal stimulus. Across the whole of Asia, cheaper money has been more potent in lifting spending than in the west. This is because, unlike in America and Europe, local financial systems are not crippled, and so banks are able to lend more. And since many Asian lenders have not been on a borrowing spree, they can afford to borrow more.

Another reason why Asia’s emerging economies have been able to rebound well before those in the advanced economies is that their downturn was caused only partly by the slump in the US. In 2008 domestic spending was squeezed by higher prices for oil and food (which account for a much higher share of household budgets than in western countries) and by tighter monetary policies, aimed at curbing inflation. Across the region, aggressive fiscal and monetary stimulus packages have helped revive domestic demand. Asia has actually had the biggest fiscal stimulus of any region of the world.

Industrial production:
Following five years of quite steady growth in industrial production across the board, the rosy picture changed in 2008 and huge cuts in production, in particular in advanced economies, took place.

Source: DnB NOR

An example of this is the effect on steel production in Germany, which is Europe’s largest producer of crude steel, which has gone down by more than 40% during the first 7 months of 2009 as compared to the first seven months of 2008. A similar sized cut down in steel production was seen in Japan, which is the world’s second largest steel producer.

On the other side of the abyss stand the growth rates of China and India, adding more to the stories of a potential decoupling of the growth locomotives in Asia from the advanced economies. China and India have shown much stronger performance during the current crisis. In term of the effect on steel production, China has expanded production in 2009 and produces now close to half of the steel in the world, equivalent to 369 mt January-August 2009.

One sector which has been hit particularly hard by the financial and economic crisis has been the auto sector. Production was halved from July 2008 to January 2009. Now, car sales have started to recover globally. Global auto production is running well below global car sales and the gap between production and sales is now huge, meaning inventories are being slashed. Ultimately, car production needs to increase as inventories run out.

Leading demand indicators:
The US Consumer Confidence Index (CCI), which had retreated in July, rebounded in August, but only to retreat again in September. The index now stands at 53.1, down from 54.5 in August. The index is struggling to stay above 50. It is the situation on the labour market and current business conditions which pulled the index down again, while expectations for the future were almost intact. Following the returned optimism in August the CCI was expected to rise to 57 in September, but that did not happen.

The European Purchasing Manager’s Index composite increased to 50.8 in September, up from 50.4 in August – thus signaling that the Euro area is on track for expansion of the economy. In terms of Asian economic data, China’s manufacturing PMI rose to 55.2 from 52.8, which was the 5th consecutive expansionary reading above 50. Global PMI composite continued to improve in September, staying north of the important 50 level with 54.3 up from August’s 51.7. This is signalling an expansion in the global manufacturing sector.

The CCI is an indicator measuring consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending. Index level 90 is considered the minimum level associated with a healthy economy. Above 100 signals strong growth.

Souce: The Conference Board

Outlook:
Global growth forecasts for the United States, Euroland, Japan and China all point into positive growth in 2010 following significant contractions in 2009. The next 2-3 quarters could prove to be particularly strong, depending on the strengh of three factors 1) a strong inventory cycle, 2) record stimulus starting to feed into sustainable demand and 3) substantial easing of the credit squeeze witnessed by a strong reversal in credit markets. It points in the direction of a syncronous recovery as oppose to the staggered downturn.

Source: Danske Bank

Global PMI is closely correlated with the OECD leading indicator and thus should improve further in the near future, thereby followed by more hard data such as industrial production and GDP. However, it is expected that the speed of improvement in the OECD’s leading indicators and order-inventory balances will start to moderate soon, but stay at healthy levels.

Source: Danske Bank

The most important question will be if the coming economic growth will spill over into shipping demand and result in improved utilisation of the fleet, and to what extent the pressure from ship overcapacity will prohibit freight rates from becoming sustainable.

in Copenhagen, DK

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