Postwar Era Global Recession

On Nov 6, the IMF released its ‘World Economic Outlook’ projects a 0.3% growth contraction for the developed economies in 2009 - the first instance of negative growth in the postwar era. US to shrink 0.7%, the Eurozone 0.5%, the UK 1.3% and Japan 0.2% respectively due to rapid transmission of the US-originated financial crisis.

Current downturn resembles global recession of early 1980s and such comparisons have also been rife in the media of late. The recession then lasted a postwar-record 36 months.

To date, GDP growth was in negative territory at the same time in the US, the UK and the Eurozone in 3Q2008. Capital expenditure is constrained because the seizure in the financial markets, which has triggered a dramatic tightening in credit markets. This compared to the 1980 as the need to end high inflation that sent real interest rates to record highs, drying up investment. Inflation expectations now anchor at a much lower level.

The US dollar continues to attract a repatriation bid as the process of global leveraging runs its course, especially against the core European currencies, which opens up short term trading opportunity for a rebound on the back of US dollar’s pattern of seasonal weakness in December, and if the repatriation bid fades.

The policy response by various governments has been intense with a high volume of government measures already being implemented with fall into four areas – support for banks, injection of liquidity into local money markets, intervention in equity markets and fiscal stimulus. In China, the authorities outline a RMB4 trillion fiscal stimulus packaged and that should help to limit downside risk to the economy.

We should give time allowance for patients to recover for credit-related illnesses, and also from related illnesses due to high dosage of antibiotics. In short, we are going to see a sustained period of ‘outrage list’ with more questionable practices, ridiculous statistics and it is getting long these days. So, you might need to pop a Valium before reading the headlines in the next couple of months.

The curative process is baked in the case, but teversing years and years of reckless overspending, over-borrowing and over-lending wouldn’t be as easy as just wave a magic wand!