Thursday, May 20, 2010

>Is Global Recovery Still in the Cards? (WELLS FARGO)

The seizing of financial markets that followed Lehman Brothers’ failure in September 2008 caused the global economy to fall into its deepest recession in decades. By the spring of 2009 industrial production (IP) in the 30 countries that comprise the Organisation for Economic Cooperation and Development (OECD) had plunged more than 15 percent from year-earlier levels (Figure 1). But the policy response—unprecedented monetary easing, expansionary fiscal policy, and the shoring up of private sector balance sheets—led to stabilization in economic activity in mid-2009 that subsequently morphed into global recovery. By early this year, the year-over-year rate of IP growth in the OECD countries had turned positive again. However, another financial crisis, in the form of sovereign debt problems in the Euro-zone, could be a distinct possibility. Will the global recovery continue, or does another global recession loom?

Let’s start with the good news. Among the major regions of the world, economic growth in Asia has been strongest to date. For example, real GDP in China increased nearly 12 percent on a year-ago basis in the first quarter of 2010. 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. What makes Asia so special? The financial systems of most Asian economies were not nearly as leveraged as those of 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. Because self-sustaining economic recoveries have taken hold, most Asian governments are beginning to remove emergency stimulus measures that were put in place when the outlook was bleak. However, we believe it will be quite some time before economic policies turn restrictive in most Asian countries.

To read the full report: GLOBAL RECOVERY