>GLOBAL CHARTBOOK :SEPTEMBER 2009 (WELLS FARGO LIMITED)

Executive Summary: Is the Deepest Recession in Decades Ending?

The heady days of 2004-2007, when global GDP growth averaged about five percent per annum, seem like a distant memory now. Growth in most countries slowed in the first half of 2008 due in part to monetary tightening, the unprecedented rise in energy prices and dislocations in credit markets. Global economic activity then went into absolute freefall in the fourth quarter of 2008 as credit markets froze up in the wake of Lehman Brothers failure, and the sharp downturn in major economies extended into the first part of this year. Industrial production in the OECD countries (i.e., the thirty most developed economies in the world) plunged 17 percent in the first quarter of 2009, by far the sharpest year-over-year rate of contraction in decades.

It could have been worse. Most major countries averted a catastrophe last year by taking steps to prevent a wholesale collapse of their financial systems via recapitalization, loan guarantees, and increased deposit insurance. In addition, governments responded to the crisis with stimulative economic policies. Major central banks slashed policy rates to unprecedented levels, and governments in most major countries opened the fiscal taps.

There are signs that the medicine is having its desired effects and that growth is returning to most economies. The global recovery is being led by Asia where growth turned positive again earlier this year. The financial systems of most Asian economies were not nearly as levered as their western counterparts, so banks in the region were able to ramp up lending again. In addition, most Asian governments responded to the crisis with expansionary fiscal policy. The year-over-year GDP growth rate in China rose from six percent in the first quarter to eight percent in the second quarter. However, the expansion is not confined to only China. Many other countries in the region, including the large economies of Japan, Korea and Taiwan, are posting positive growth rates again.

There is solid evidence to suggest that Canada, the United States and most economies in Western Europe have stabilized. Production was slashed much faster than final demand in most western economies, leading to sharp declines in inventories. It appears that massive inventory liquidation has come to an end, and manufacturers are beginning to ramp up production to bring output back in line with final sales. In that regard, stimulus measures enacted late last year and earlier this year are helping to boost activity. Most western economies should post positive growth rates over the next few quarters. That said, the modest global upturn that appears to be underway remains fragile, and a self-sustaining recovery has not yet been firmly established.

The Dollar Should Appreciate Modestly versus Major Currencies
The dollar strengthened significantly last autumn as risk aversion spiked. U.S. Treasury securities are considered to be the safest assets in the world, and massive buying of U.S. government bonds by foreign investors contributed to the dollar’s strength. The greenback has given up most of its gains over the past few months as investors have turned less risk averse. With stock markets rising in most countries and corporate bonds rallying, the safety of low-yielding U.S. Treasury securities is not as compelling as it was only a few months ago when worst-case scenarios did not seem farfetched.

Looking ahead, the currency strategy team of Wells Fargo projects that the dollar will trend modestly higher against most major currencies. Investors expect that most major central banks, including the Federal Reserve, the European Central Bank and the Bank of England, will be on hold until well into next year. Therefore, expected changes in short-term interest rates will not have as much an influence on exchange rates as in the past. As the U.S. recovery gathers steam, foreign investment flows into long-term securities (e.g., corporate bonds and equities) and direct investment inflows should resume, helping to lift the greenback. In addition, the decline in the U.S. current account deficit should exert less headwind on the greenback than it did earlier this decade when the dollar was trending lower.

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