Too early to pop up champagne?

From time to time, it is necessary to get a bird’s eye view of the financial market. And given the market’s recent run-up, such a moment has arrived. A number of economic and financial variables have exhibited signs of improvement recently, even if macro indicators are still mixed. Indeed, the pace of economic deterioration has slowed significantly.

However, that does not mean the recession in the US is already over, as many analysts have argued. In the second half of 2009, I still expect policy measures will boost real GDP growth, albeit in a temporary manner.

Some of the so-called ‘green shoots’ observed in recent months can be defined as green shoots only if compared with the economic picture painted at the beginning of the year. The inventory adjustment will largely be over by the middle of 2010 as will the impact of the stimulus. Risk is that as the recovery in private demand will remain weak, the economy is poised to slip back to anemic growth, posing the risk of a double-dip recession.

Exhausting most policy measures now means that there will be little room for additional fiscal and monetary stimuli in the future. Policy measures entailing long term fiscal costs can only provide temporary stimulus to growth.

Structural weakness in consumer and housing market will persist even after the economy is out of recession. Productivity growth has held up, not due to innovation or productive investment, but due to aggressive cuts in labour and labour hours by firms.

I think that we are going to see another leg down when the current rally ends, just as the powerful rally following the initial crash in 1929, ended up dealing out severe losses to those who held onto their shares.