Monday April 27, 2009
Hock's View - By Choong Khuat Hock
IN answering the above question, one would have to look at the position of China in the world today.
Although China overtook Germany to become the world’s third largest economy in 2008 and is likely to overtake Japan possibly in 2010, it only accounted for 6.8% of the world economy in 2008.
Large economies like the United States, European Union and Japan, which in total account for 61.1% of the world economy, are in recession. China’s gross domestic product (GDP) slowed down to 6.1% in the first quarter of 2009 from 10.6% inthe first quarter of 2008. Even if China can grow at 8% this year, it would only contribute around 0.5 percentage points to world growth while a contraction of say 3% for the United States, Europe and Japan would subtract around 1.8 percentage points from world growth.
Another way to look at China’s potential impact is to look at its impact on world trade. If a country with a large population and GDP does not trade with the world, its growth or contraction will not impact the economy of other nations. Although, imports and exports are linked, the amount that a country imports impacts directly trade with the exporting nation. It can be seen that the collapse of US imports is the main reason for the plunge in Asian and Malaysian exports.
This results in a vicious cycle of global trade contraction as countries suffering from lower exports will in turn import less raw materials, semi-finished goods and machinery. Eventually, shrinking global trade will also negatively impact US exports.
China has been the largest marginal buyer of commodities like oil, iron and copper, and when it imports less commodities, commodity prices collapse. China is the world’s largest exporter and imports mainly raw materials and some higher end machinery and semi-finished goods.
Chinese imports from the rest of the world have grown over the years but its imports at US$866.2bil in 2008 are still significantly below that of the United States at US$2.1 trillion.
Hence even if the 4 billion renmimbi (RM2.1bil) fiscal stimulus boosts the Chinese economy and hence imports, higher Chinese imports are unlikely to offset a decline in US, German and Japanese imports, which in total amounted to US$3.9 trillion in 2008, which is 4.5 times greater than what China imported. Indeed, Chinese import growth has declined by 25% year-on-year in March 2009.
Based on the above argument, it would appear that China, with a low government debt to GDP of slightly over 20% and reserves of US$2 trillion, may be able to save itself but not the world.
Nevertheless, exports of essential foodstuff to China like vegetable oil should be relatively more resilient compared to raw materials like iron and copper which is more dependent on industrial activity.
Chinese fiscal stimulus alone is insufficient to save the world but will go some way towards stabilising commodity demand and prices. A lot still depends on US consumers who are unfortunately trying to save themselves from drowning in a sea of debt.
With US consumer debt (housing and consumer) at 92% of GDP and with rising unemployment and falling wealth (lower house and stock prices), US consumers will have to deleverage over a long period, perhaps over a decade if the Japanese post-1990 real estate bubble experience is to be taken as an example. That can only mean that imports from Asia are unlikely to recover quickly.
ทChoong Khuat Hock is head of research at Kumpulan Sentiasa Cemerlang Sdn Bhd. Readers’ feedback is welcome. Please email to starbiz@thestar.com.my
ฉ 1995-2009 Star Publications (Malaysia) Bhd (Co No 10894-D)
Monday, April 27, 2009
Friday, April 17, 2009
IMF says recession likely to be long, recovery slow
WASHINGTON, April 16 — The current global recession is likely to be unusually long and severe and the recovery sluggish because it sprang from a financial crisis, the International Monetary Fund said today.
New IMF analysis shows recessions tied to a financial crisis, like the current one that has its roots in reckless lending for the US housing market, are more difficult to shake because they are often held back by weak demand.
Worse still is that today’s recession combines a financial crisis at the heart of the United States, the world’s largest economy, with a broader global downturn making it unique, the Fund added.
“The analysis suggested that the combination of financial crisis and a globally synchronised downturn is likely to result in an unusually severe and long lasting recession,” the IMF said in chapters of its World Economic Outlook, which is to be released in full on April 22.
It said counter-cyclical policies can help shorten recessions but its impact is limited in the presence of a financial crisis.
Fiscal stimulus can be particularly effective in shortening the life of a recession though not appropriate for countries with high debt levels, it added.
In its most recent forecast, the IMF said the world economy will shrink in 2009 by between 0.5 per cent and 1.0 per cent, the largest contraction since the Great Depression.
With advanced economies all in recession and growth in emerging market economies slowing abruptly, the IMF has urged countries to move quickly to clean up their financial sectors, in particular remove toxic assets from bank balance sheets, which would allow the economy to mend.
The IMF said dealing with the current global recession will require coordinated monetary, fiscal and financial policies.
In the short term, aggressive monetary and fiscal policy measures are needed to support demand.
Still, the IMF said restoring confidence in the financial sector was vital for economic policies to be effective and for recovery to take hold.
Emerging market stress
Turning to emerging economies, the IMF said the current level of financial stress in emerging market countries has already hit peaks seen during the 1997-98 crisis.
It said abrupt slowdowns in capital inflows have typically had dire consequences in these countries. The extent of the spillover from advanced to emerging economies is related to how closely their financial sectors are linked.
Using a new financial stress index, the IMF said current stress levels in advanced economies suggest capital flows to emerging economies, especially flows related to banking, will decline sharply and will recover slowly.
The latest reading from February 2009 shows that the steepest decline — an annual contraction of 17.6 per cent — was recorded in central and eastern Europe, the region hardest hit by the crisis.
Even countries with lower current account and fiscal deficits, and higher foreign reserves, cannot escape financial the spillover from advanced economies, the IMF said.
However, as a recovery takes hold, those with smaller current account and fiscal deficits can make a quicker comeback than those with bigger deficits, it added. — Reuters
New IMF analysis shows recessions tied to a financial crisis, like the current one that has its roots in reckless lending for the US housing market, are more difficult to shake because they are often held back by weak demand.
Worse still is that today’s recession combines a financial crisis at the heart of the United States, the world’s largest economy, with a broader global downturn making it unique, the Fund added.
“The analysis suggested that the combination of financial crisis and a globally synchronised downturn is likely to result in an unusually severe and long lasting recession,” the IMF said in chapters of its World Economic Outlook, which is to be released in full on April 22.
It said counter-cyclical policies can help shorten recessions but its impact is limited in the presence of a financial crisis.
Fiscal stimulus can be particularly effective in shortening the life of a recession though not appropriate for countries with high debt levels, it added.
In its most recent forecast, the IMF said the world economy will shrink in 2009 by between 0.5 per cent and 1.0 per cent, the largest contraction since the Great Depression.
With advanced economies all in recession and growth in emerging market economies slowing abruptly, the IMF has urged countries to move quickly to clean up their financial sectors, in particular remove toxic assets from bank balance sheets, which would allow the economy to mend.
The IMF said dealing with the current global recession will require coordinated monetary, fiscal and financial policies.
In the short term, aggressive monetary and fiscal policy measures are needed to support demand.
Still, the IMF said restoring confidence in the financial sector was vital for economic policies to be effective and for recovery to take hold.
Emerging market stress
Turning to emerging economies, the IMF said the current level of financial stress in emerging market countries has already hit peaks seen during the 1997-98 crisis.
It said abrupt slowdowns in capital inflows have typically had dire consequences in these countries. The extent of the spillover from advanced to emerging economies is related to how closely their financial sectors are linked.
Using a new financial stress index, the IMF said current stress levels in advanced economies suggest capital flows to emerging economies, especially flows related to banking, will decline sharply and will recover slowly.
The latest reading from February 2009 shows that the steepest decline — an annual contraction of 17.6 per cent — was recorded in central and eastern Europe, the region hardest hit by the crisis.
Even countries with lower current account and fiscal deficits, and higher foreign reserves, cannot escape financial the spillover from advanced economies, the IMF said.
However, as a recovery takes hold, those with smaller current account and fiscal deficits can make a quicker comeback than those with bigger deficits, it added. — Reuters
Wednesday, April 15, 2009
How long is this recession journey going to be?
Wednesday April 15, 2009
How long is this recession journey going to be?
Are we there yet? We may be in uncharted territory as far as the depth of the current economic turmoil is concerned
IF you have children, especially the talking ones and below five years old, this phrase is very common, especially when travelling.
My wife and I recently took our four-year-old daughter for a short break and this was the first time she was on a flight of a little over five hours, although previously we did take her to places of shorter distances by air or road.
It was a day-time flight, meaning she was wide awake throughout the journey. While we did tell her the flight would take over five hours, it is perhaps difficult for a four-year-old to comprehend or understand what five hours mean (although there’s no denying that she can count).
Hence, without fail and little to our surprise, she kept asking us the same question over and over: “Are we there yet?” Of course, we had no choice but to keep reminding her that the flight time was five hours and we would be there in four hours, thereafter it became three hours, two hours and so forth ... until we actually landed!
Now let’s be adults and think about the journey that we are in right now, the recession journey that started in December 2007 (well, at least as far as the National Bureau of Economic Research is concerned) and is now about 17 months old.
The question in everyone’s mind is: How long is this recession journey going to be? By historical standards, the longest journey in living memory for a recession was the 44-month recession period the world endured during the Great Depression of 1929-1932, while the shortest was the six-month period in the US economic contraction in the early 1990s.
The RM64,000 question is of course: “How long will this global recession last?” or in other words, “Are we there yet?”
While for a journey that has a definite time span, like taking a flight to a destination that one knows for certain the expected time of arrival, the current economic turmoil has no “final destination” and no timeline set as we are perhaps now in uncharted territory as far as the depth of the crisis is concerned.
Some investment gurus have called the recent turn of economic data points as confirmation that the worst may be behind us and that it is now time to accumulate stocks and assume higher-risk appetite.
We have observed in the past month a strong and meaningful rally in the global equity markets, to the extent that some are already saying that we are in a bull market (defined as rising 20% from the low).
But make no mistake. If one were to analyse the current market euphoria, this is in fact a third bull market that the Dow has experienced over the past six months and, on every occasion, the Dow had risen more than 20% from the lows. However, weak economic data points and failure of the US banking system saw markets making fresh lows yet again. Is it any different this time?
Some of the rationale for the current market euphoria are based on economic data points that boosted investors’ confidence on two counts.
First and foremost, they beat market expectations and, second, the data points showed that there has been some reversal in either the pace of decline or, better still, they showed that they have improved compared with the preceding month.
My analysis of these data points show that while it is clearly acceptable for investors to rush into equities if the monthly data show that they were better than expected, I am rather baffled as to the market’s reaction to data points that simply showed improvement on a month-to-month basis as it is rather clear that when some of these data points are compared with a year ago, the pace of fall is still large and, for some data points, they are still way below “normalised” levels.
For example, US construction spending showed a 0.9% decline in February compared with the preceding month’s fall of 3.5%.
However, when one compares this with before the start of the recession in December 2007, construction spending is still down by some 15%.
US housing starts too rebounded about 22% in February to 583,000, but when compared with a year earlier, they are still down by a massive 47%!
Other recent data that showed similar trends were the US durable goods order, which rebounded by 3.5% month-on-month in February. However, when compared with the December 2007 level, the number is still down by a massive 26%.
Meanwhile, US consumer confidence remains at near multi-year low (well at least as far as the March 2009 figures are concerned) while the US Purchasing Managers Index (PMI) of the Institute of Supply and Management (ISM) for both the manufacturing and the services sector remains deeply in contraction.
Hence, while we are seeing some sort of rebound in some data points, clearly the low base effect is taking shape nicely for investors to feel good for the moment.
In essence, what matters most are strong and sustainable rebound in consumer confidence as well as a growth in both the US PMI of the ISM indices.
Until and unless we are able to see some of these data points in a convincing manner, we have not taken the recession journey fully and, hence, we are not there yet.
Pankaj C Kumar is chief investment officer at Kurnia Insurans (M) Bhd. Readers’ feedback to this article is welcome. Please e-mail to starbiz@thestar.com.my
How long is this recession journey going to be?
Are we there yet? We may be in uncharted territory as far as the depth of the current economic turmoil is concerned
IF you have children, especially the talking ones and below five years old, this phrase is very common, especially when travelling.
My wife and I recently took our four-year-old daughter for a short break and this was the first time she was on a flight of a little over five hours, although previously we did take her to places of shorter distances by air or road.
It was a day-time flight, meaning she was wide awake throughout the journey. While we did tell her the flight would take over five hours, it is perhaps difficult for a four-year-old to comprehend or understand what five hours mean (although there’s no denying that she can count).
Hence, without fail and little to our surprise, she kept asking us the same question over and over: “Are we there yet?” Of course, we had no choice but to keep reminding her that the flight time was five hours and we would be there in four hours, thereafter it became three hours, two hours and so forth ... until we actually landed!
Now let’s be adults and think about the journey that we are in right now, the recession journey that started in December 2007 (well, at least as far as the National Bureau of Economic Research is concerned) and is now about 17 months old.
The question in everyone’s mind is: How long is this recession journey going to be? By historical standards, the longest journey in living memory for a recession was the 44-month recession period the world endured during the Great Depression of 1929-1932, while the shortest was the six-month period in the US economic contraction in the early 1990s.
The RM64,000 question is of course: “How long will this global recession last?” or in other words, “Are we there yet?”
While for a journey that has a definite time span, like taking a flight to a destination that one knows for certain the expected time of arrival, the current economic turmoil has no “final destination” and no timeline set as we are perhaps now in uncharted territory as far as the depth of the crisis is concerned.
Some investment gurus have called the recent turn of economic data points as confirmation that the worst may be behind us and that it is now time to accumulate stocks and assume higher-risk appetite.
We have observed in the past month a strong and meaningful rally in the global equity markets, to the extent that some are already saying that we are in a bull market (defined as rising 20% from the low).
But make no mistake. If one were to analyse the current market euphoria, this is in fact a third bull market that the Dow has experienced over the past six months and, on every occasion, the Dow had risen more than 20% from the lows. However, weak economic data points and failure of the US banking system saw markets making fresh lows yet again. Is it any different this time?
Some of the rationale for the current market euphoria are based on economic data points that boosted investors’ confidence on two counts.
First and foremost, they beat market expectations and, second, the data points showed that there has been some reversal in either the pace of decline or, better still, they showed that they have improved compared with the preceding month.
My analysis of these data points show that while it is clearly acceptable for investors to rush into equities if the monthly data show that they were better than expected, I am rather baffled as to the market’s reaction to data points that simply showed improvement on a month-to-month basis as it is rather clear that when some of these data points are compared with a year ago, the pace of fall is still large and, for some data points, they are still way below “normalised” levels.
For example, US construction spending showed a 0.9% decline in February compared with the preceding month’s fall of 3.5%.
However, when one compares this with before the start of the recession in December 2007, construction spending is still down by some 15%.
US housing starts too rebounded about 22% in February to 583,000, but when compared with a year earlier, they are still down by a massive 47%!
Other recent data that showed similar trends were the US durable goods order, which rebounded by 3.5% month-on-month in February. However, when compared with the December 2007 level, the number is still down by a massive 26%.
Meanwhile, US consumer confidence remains at near multi-year low (well at least as far as the March 2009 figures are concerned) while the US Purchasing Managers Index (PMI) of the Institute of Supply and Management (ISM) for both the manufacturing and the services sector remains deeply in contraction.
Hence, while we are seeing some sort of rebound in some data points, clearly the low base effect is taking shape nicely for investors to feel good for the moment.
In essence, what matters most are strong and sustainable rebound in consumer confidence as well as a growth in both the US PMI of the ISM indices.
Until and unless we are able to see some of these data points in a convincing manner, we have not taken the recession journey fully and, hence, we are not there yet.
Pankaj C Kumar is chief investment officer at Kurnia Insurans (M) Bhd. Readers’ feedback to this article is welcome. Please e-mail to starbiz@thestar.com.my
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