AFTER an upsurge of hope that the economic worst might soon be over and depression averted, last week saw doubts setting in. Markets had assumed too much, too soon.
Historians reminded us that the 1930s Great Depression was punctuated by brief flurries of seeming recovery followed by relapse, while George Soros warned of an outcome we all have cause to fear: not a 'V' shaped recovery, or even a 'U', but a prolon
ged 'L' – a precipitous drop in output, activity and employment, followed by a lengthy period of flat-lining – a cessation of decline but no uplift; stabilisation but no recovery.
However, while a lift off the bottom may be slow to unfold in the West, across emerging Asia a strong rebound looks to be taking shape. That is good news indeed for export-dependent economies that have been worst hit by the slump. And it should work through in due course to debt-laden Western economies where domestic demand is being pulled down by rising unemployment and poor consumer confidence.
Last week brought a batch of economic data out of Asia pointing to the start of economic recovery, with output upturns in South Korea, Taiwan and China. "The rebound is proceeding at an impressive pace," says Barclays Capital economist Larry Kantor.
The rebound has been led by a surge in China, with a strong recovery in the industrial sector in the first quarter. Emerging Asia looks to be following suit. Manufacturing output jumped almost 8% in Korea in February following a more modest 1.5% gain in January. The March export figures for Taiwan showed a 19% increase from December. "The high level of trade within the region suggests that economic expansion is spreading throughout emerging Asia," says Kantor.
Japan is lagging this recovery. But there are signs even there that the manufacturing sector may be turning up. Industrial production data released last week showed an expected large drop in output in February, but also indicated that manufacturers expect to increase production in March and April.
"The early indications are that the cycle in Asia is tracing out a classic and sharp V-shaped pattern," says Kantor. "While it is still far from clear how quickly or significantly the recovery in Asia will transmit around the globe, it seems highly likely that it will continue for at least several more months."
What should help sustain this recovery is that official policy support is being increased. Japan, for example, announced last week it was boosting its planned fiscal stimulus by some 2% of GDP. A feature of the pick-up in activity in emerging Asia is that it is driven by domestic demand and this should, in time, help lift manufacturing activity elsewhere. The rise in February US exports may have been one of the first indications of this.
If this rebound is sustained, it would confirm a defining and historic shift of global economic power from West to East and establish a marker for the new, post-crash era. For two decades the dominant feature of the world economy has been the impressive pace at which Asia has been narrowing the wealth and output gap between it and the mature established economies of the West. An economic world in which Asia is first out of the worst global recession in decades while America and Europe are still struggling to soften and halt their decline portends a notable change of gear in that process while strengthening Asia's claim for a greater say in global economic summitry.
Certainly for the immediate term, both America and Europe will have further pain to endure before there is a real prospect of sustained recovery. But was it not the prospect of recovery that gave a big lift to markets last month? Doubts have now set in. The minutes of the US Federal Reserve's mid-March Open Markets Committee meeting released last week showed the committee taking a more pessimistic view of economic prospects than the markets had supposed. There was a shared concern that "credit markets were still not working well" and that "nearly all meeting participants said that conditions had deteriorated relative to their expectations at the time of the January meeting".
One reason this downbeat message jarred with markets is that in mid March the Fed chairman Ben Bernanke said he had seen some "green shoots" of recovery. But given what the FOMC has concluded, what does the Fed believe is the real state of the US economy?
The "green shoots", it transpires, were not what the markets, still less the general public, generally understood by the term, but instead the actions that the Fed had taken and their impact in relieving market tensions, specifically the Fed's purchase of mortgage-related securities which has helped bring down the cost of mortgage borrowing.
Now the FOMC, the minutes reveal, is not as sanguine about conventional 'green shoots', and "did not interpret the up-tick in housing starts as the beginning of a new trend."
Here in the UK attention has been principally focused on the availability of finance for business borrowers. Not only were companies finding it more difficult to obtain new finance, but terms were also being tightened on existing loan arrangements. This was the background to government moves to provide insurance for some £650m of bank toxic assets and the purchase by the Bank of England of commercial paper and corporate bonds through a £75bn programme of "quantitative easing".
Overall availability of credit to companies showed a small improvement in the first quarter and banks have said they expect further improvement in the current quarter. But such optimism has been tempered by continuing reports of a tightening by banks of non-price terms, stricter interpretations of banking covenants and an increase in collateral requirements. Little wonder, perhaps, that demand for new credit facilities has fallen more sharply than expected – and is likely to fall further.
Two further concerns are pressing. The first is the effect of rising unemployment on consumer spending and confidence in the months ahead. It is hard to see domestic demand making much of a recovery with evidence growing almost by the day that unemployment is heading for three million. The second is growing concern over the appalling state of the public finances as Budget Day (April 22) approaches. The work of quantitative easing in bringing down gilt yields may be undone if overseas buyers take fright at the massive amount of government debt being stacked up by an administration ideologically and politically disinclined to announce any significant cuts in public spending.
Little wonder the process has already started of edging expectations of recovery back over the horizon to 2010. There is recovery, and there is a slackening in the ferocious rate of decline. They are not at all the same thing. For the UK at least, the Soros warning of an L of an economy could prove dismally true.
