Just How Bad Was the 2009 Global Recession? Really, Really Bad
by Andrew Mayeda
October 20, 2015 — 5:00 PM EDT
1) Slump was most severe of four since 1960, IMF book says
2) Fiscal tightening undercut monetary policy, researchers find
The global recession that followed the financial crisis was the most severe in half a century, an unusually synchronized shock that paralyzed trade and left 23 million more people out of work.
Yet the response by policy makers hasn’t been up to the task, with central banks bearing too much of the burden. And the world may be on the edge of another recession, even though it hasn’t recovered from the last one.
Those are the conclusions of a new book on business cycles released Tuesday by the International Monetary Fund.
“The 2009 episode was the most severe of the four global recessions of the past half century and the only one during which world output contracted outright -- truly deserving of the ‘Great Recession’ label,” write Ayhan Kose, director of the World Bank’s Development Prospects Group, and Marco Terrones, deputy division chief at the IMF’s research department.
“The possibility of another global recession lingers in light of the persistently weak recovery, even though damage from the previous one has yet to be fully repaired.”
The 272-page book, “Collapse and Revival: Understanding Global Recessions and Recoveries,” underscores the challenges policy makers face as they try to jumpstart a sputtering recovery more than six years after the global financial crisis.
A slowdown in emerging markets driven by weak commodity prices forced the IMF this month to cut its outlook for global growth in 2015 to 3.1 percent, which would be the weakest rate since 2009, from a July forecast of 3.3 percent
Kose and Terrones try to answer a question that has become more pressing as nations become more integrated: How do you define a global recession? For individual countries, the rule of thumb is two consecutive quarters of falling output. That convention is difficult to apply to the world economy, which rarely contracts.
Citigroup Forecast
In predicting a global recession next year, Citigroup Inc. Chief Economist Willem Buiter recently forecast that world growth would slow to “well below” 2 percent in 2016.
Kose and Terrones define a recession as a contraction in inflation-adjusted output per capita accompanied by a broad, synchronized decline in various measures, such as industrial production, unemployment, trade and capital flows, and energy consumption.
By that standard, there have been four world recessions since 1960, starting in 1975, 1982, 1991 and 2009. In only the last case did the global economy shrink.
The 2009 downturn was “by far” the deepest, Kose and Terrones found. It was also the broadest, with almost all advanced economies and a large number of emerging and developing countries contracting. About 65 percent of countries fell into recession, the highest among the four slumps.
World output bounced back after the last recession faster than any of the other episodes. But the recovery has been weak and uneven, with advanced economies experiencing their weakest rebound and emerging markets enjoying their strongest.
Underwhelming Recovery
The authors cite several possible reasons for the underwhelming nature of the recovery, including elevated levels of economic and policy uncertainty and the tendency for financial crises to trigger deeper recessions.
Kose and Terrones also point to a lack of coordination between fiscal and monetary policy. In past recoveries, countries moved “decisively” to increase government spending. Yet in 2010, driven by market and political pressures, governments instead cut spending, even as central banks such were using unconventional measures such as bond buying to encourage borrowing.
Nobel-Prize winning economist Milton Friedman likened recoveries to a guitar string, arguing that the harder the string is pulled, the faster it returns. The present recovery is putting that theory to the test.
“The guitar string seems to have been pulled down so hard that it snapped,” Kose and Terrones say.
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So 2010 was an example of governments cutting spending as contrasted with increasing spending.
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UBS Analyst Who Called Emerging-Market Rout Sees Rebound Fading
by Ye Xie t xieye
bloomberg
October 27, 2015 — 6:37 PM EDT
The one-month long rebound in emerging-market assets is poised to reverse, according to Bhanu Baweja, a UBS Group AG strategist, who correctly called this year’s rout.
While expectations for more monetary easing from global central banks have helped stabilize developing-nation stocks and currencies in the past month, weakness in exports and commodity prices as well as higher debt repayments will keep the assets under pressure, said Baweja, USB’s head of emerging-market cross asset strategy in London.
“Today EM sentiment is taking a break from perceived extreme negativity,” Baweja wrote in a note Tuesday. “However, fundamentals are still slowly worsening.”
South Africa’s rand, the Indonesian rupiah, Malaysia’s ringgit and the Columbian peso will lead the renewed decline “before long,” while emerging-market stocks will start underperforming their peers in advanced economies again, he said.
A Bloomberg gauge of emerging-market currencies has risen 2.3 percent from the record low set in late September while the MSCI Emerging Markets Index of stocks advanced 11 percent from a six-year bottom reached in August. The respite came amid speculation the Federal Reserve will refrain from raising interest rates this year while Chinese policy makers lowered borrowing costs.
No EnthusiasmThe rally is driven by investors unwinding their bearish positions, rather than “new found enthusiasm” for emerging markets, Baweja said. Worsening balance sheets mean developing-nation assets are less responsive to the positive impact from lower global rates, he said.
In his 2015 outlook, published in November, the strategist and his team warned about a potential decline in emerging-market currencies, saying developing nations lack a “Plan B” for growth. He recommended selling Brazil’s real and stocks as one of the top trades for this year, a call that proved prescient as the assets have been among the worst performers globally.
In Tuesday’s note, Baweja said that the continued weakness in commodity prices during this emerging-market rally suggests that China still needs to reduce excess production capacity. New orders-to-inventories ratios in the U.S. and Europe also signal lukewarm global growth. Both developments will be negative for emerging markets, he said.
More than $500 billion of dollar-denominated government and corporate bonds are coming due next year, compared with about $350 billion this year, adding to capital outflows from developing countries, according to UBS.
UBS kept its recommendation to sell the Asian currencies including the Singapore dollar and Thailand’s Bhat against the dollar while betting that the rand and Turkish lira will decline versus India’s rupee. The bank also has a “negative” view on credit markets in Turkey, South Africa, Colombia, Mexico, India and Indonesia
bloomberg.com
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bloomberg.com
The Swiss National Bank is doing everything possible to stop the land rush into the Gold backed swiss franc...
are those 2 of the places that you actually want to be.......... |
