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Modest Recovery, Searching for Stability

A Summary of Remarks by
Cliff Waldman
Manufacturers Alliance/ MAPI Global
March 4, 2010

Manufacturers Alliance/MAPI Global Economist Cliff Waldman overviewed the prospects for world economic recovery in the wake of the most severe global downturn since World War II.  He noted that spot price and financial markets suggest a modest and partial global rebound, with forecasters suggesting that much of world growth in the near future will come from select emerging market nations.  In sharp contrast, the rich nations are expected to languish in a subpar rebound with the key catalyst for even modestly positive economic activity being renewed stability in the global trading system.

The economist reviewed recent data from the United States and China, explaining that the dramatically contrasting near-term prospects of these two pivotal economies set the stage for a period of uneven world expansion.  As is normally the case in the early stages of an economic recovery, the U.S. has returned to positive gross domestic product (GDP) growth largely as a result of the diminished pace of inventory liquidation.  The pace of renewed growth in consumer spending and business investment has been impeded by the efforts of U.S. households to remove debt and add liquidity to balance sheets, by the persistence of high unemployment, and by historic excess business capacity coupled with shaky business confidence in the sustainability of the U.S. rebound.

Financial and housing markets, the epicenters of the largely U.S.-generated global crisis, have stabilized but remain worrisome.  Financial conditions have stopped deteriorating as credit spreads have narrowed and the incidence of bank tightening for mortgage and business credit has diminished.  But banks remain ultra-conservative in their lending practices as they seek to repair balance sheets.    More stable financial conditions coupled with housing-related provisions in the federal economic recovery act (signed into law during February 2009) appears to have at least put a floor under both new and existing home sales.  Recent sales data, however, lend credence to arguments that the housing market is not yet in a sustainable recovery phase.  And, while the pace of home price declines has slowed, it appears that a full-fledged home price recovery remains a forecast and not yet a reality. 

Given the sensitivity of the manufacturing sector to early cycle inventory swings, it is thus far showing a stronger pace of recovery than the still sluggish non-manufacturing component of the economy, whose tentative rebound remains a contributor to weak labor market conditions.  The recovery in export and import demand is encouraging for manufacturing, given the factory sector’s reliance on external demand and the global economy’s reliance on U.S. import strength.  The economist summarized the U.S. economic picture with Manufacturers Alliance/MAPI’s current 2010 and 2011 forecast that U.S. economic growth will be modest over the next two years (2.8 percent in 2010 and 3.0 percent in 2011), not strong enough to affect a measurable improvement in high unemployment.  Consumer spending growth is expected to be significantly weaker than gross domestic product (GDP) growth and manufacturing output growth is expected to be modestly above 5 percent, not enough to absorb significant excess production capacity in manufacturing until about 2013.

China, by contrast to the United States, appears to have avoided a feared hard landing scenario as growth slowed significantly but rebounded sharply throughout 2009.  Given China’s strong trade ties with neighboring Asian economies, the middle kingdom’s rebound is bullish for the broad Asian outlook.  But while China’s GDP and manufacturing growth prospects are quite favorable for 2010 and 2011, the economist noted that neither is expected to grow at the pace seen in 2006 and 2007, the years just prior to the global economic crisis.  A strong rebound in export demand presents an upside risk to the forecast, however.

Turning to the industrialized nations outside of the U.S., the speaker noted a mixed and uneasy bottom for the large Eurozone economies.  Eurozone GDP growth for 2010 and 2011 is expected to be roughly half that of 2006 and 2007.  And while industrial production forecasts have brightened somewhat for the Eurozone, monthly production data suggest a downside risk to the factory sector outlook for key Eurozone nations.  Buoyed by modestly firming activity in the U.S. and the Eurozone along with a weaker currency, the 6-quarter GDP contraction in the United Kingdom ended with sluggish 1.2 percent annualized growth during the fourth quarter of 2009.  Economists expect the U.K. economic recovery to be modest, with manufacturing a lagging sector.

The Canadian economic recovery is also export-generated but appears far stronger than in the U.K.  Annualized GDP growth was 5 percent during the fourth quarter of 2009 and a long stretch of modest or negative export activity appears to have turned the corner with 14 percent annualized export growth during the second half of 2009.  Canada was the only major industrialized economy to have avoided a banking crisis but has suffered from a lengthy period of weakness and contraction in its industrial sector.  Economists hope that renewed export growth will generate an industrial recovery and a return to moderate growth during 2010 and 2011.  But the speaker noted that much depends on the progress of recovery in U.S. manufacturing, a key source of demand for Canadian exports. 

An export recovery is also playing a large role in the Japanese outlook as it struggles to recover from what was arguably the deepest recession among the major industrialized nations.  Japanese GDP growth registered a stronger-than-expected 4.6 percent during the fourth quarter of 2009 and the manufacturing sector continues on what has now been a 3-quarter recovery path as the near implosion of exports has reversed due to firming world demand and a weaker currency.  Weak but positive domestic demand and persistent deflation remain concerns for the Japanese economy.  But, for the time being, a sluggish recovery in GDP growth is expected during 2010 and 2011 concomitant with a partial recovery from a more than 20 percent contraction in industrial production.

The economist noted that the mixed data for Central and Eastern Europe is somewhat reflective of the diverse outlook for developing economies globally.  The Polish economy has demonstrated strength throughout the global downturn, slowing but not contracting.  During the fourth quarter of 2009 GDP growth in Poland accelerated to a strong 6.5 percent on an annualized basis.  Poland’s smaller reliance on exports along with a somewhat better fiscal position than other key Eastern European nations helped it to avoid the fairly sharp economic downturns that were seen in Hungary and the Czech Republic.  As a whole, the Eastern European region suffered an adversarial export impact from the falloff in global demand.  But hints of a modest recovery in manufacturing suggest that the worst impact of the global downturn may have passed. 

Industrial production data for the fourth quarter of 2009 show that the emerging Asian nations are enjoying a stronger manufacturing recovery than is the case in emerging Europe.  South Korean industrial production growth was above 15 percent (year-over-year) while Thai industrial production growth was nearly 15 percent.  The strong rebound in industry has been spurred by a substantial and wide GDP growth recovery throughout the East Asian nations outside of China and Japan.  Weaker currencies have been a recovery catalyst in this highly export-dependant region.  The recent strengthening of currencies, therefore, could present a modest downside risk.

Firming growth in the Indian economy further reinforces positive prospects for near-term Asian economic performance.  GDP growth appears to have stabilized after a persistent slowing since the fourth quarter of 2007.  And the strong surge of industrial production growth to 13 percent during the fourth quarter of 2009 suggests that GDP growth could return to 8 percent during FY 2010 as trade stabilizes and domestic demand experiences a moderate reacceleration.  

By contrast to India, Brazil experienced an actual contraction in GDP but it was modest and now appears to be easing.  Further, early hints of a sharp rebound in manufacturing foreshadow what could be a strong economic recovery, according the speaker.  For the time being however, forecasters are sticking to a moderate rebound scenario for both GDP and industrial production.  The economist asserted that wise long-term policies in the form of innovation investment, entrance into global markets, and improved management of public debt will likely allow Brazil to be a regional if not global growth leader.

Russia and Mexico are two emerging economies with weaker long-term growth prospects than China, India, and Brazil.  Russia suffered a deep slide in GDP growth and is burdened by a poor financial structure and over-reliance on commodity exports for growth.  For the moment, the deep contraction in Russian industrial production growth has abated, catalyzed by a revival of export demand and the positive knock-on effects to gross investment.  But significant structural problems are likely to make Russia a laggard among the large developing nations in the emerging global recovery.  Mexico suffered a deeper contraction in GDP than the U.S. and Canada but the downturn abated significantly during the fourth quarter of 2009 and a potential industrial recovery is likely a harbinger of a broader economic recovery.   Forecasters expect a modest rebound for both GDP growth and manufacturing production growth in Mexico.  But, as is the case with Canada, much depends on the strength and sustainability of the nascent U.S. manufacturing recovery.
The economist concluded his discussion of the developing world by noting a number of factors that separate strong from weak emerging market economies.  These include involvement in global markets, diversification of markets, and various types of investment, which include capital investment, innovation investment, and infrastructure investment.  He also noted the importance of demographics, exemplified by the dichotomy between Russia, which suffers from declining population numbers, and India, which benefits from a youthful population.

The speaker discussed the challenge, worldwide, of adjusting historically stimulative monetary and fiscal policies within the conflicting concerns of a still shaky economic and financial recovery in the developed economies but with growing concerns about medium-term inflation potential and expanding fiscal deficits.  He offered the following conclusions to his presentation:

Equilibrium in a two-speed world will be characterized by the following:

Challenges and risks to the recovery include:

Cliff Waldman is Economist and Council Director at the Manufacturers Alliance/ MAPI Global. His previous positions include Economist at the National Federation of Independent Business and the New Jersey Department of Labor as well as President of Waldman Associates. He has published several papers on the Chinese economy, including studies of labor market and demographic trends, and authors the Quarterly Forecast of U.S. Exports, Global Growth, and the Dollar. He earned his M.A. in Economics from Rutgers University.

Rapporteur: Susan Doolittle

 

 

 

 

 

 

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