March 31, 2009
Posted by: Dave Bhagat
Finance is the art of passing money from hand to hand until it
- Robert W. Sarnoff
In the early days of this housing and financial crisis, many
thought that parts of the global economy might escape unscathed.
This was said most often with respect to the BRIC countries and
some of the smaller Asian economies as well. The argument seemed
compelling in certain respects - after all, in most of these
countries, banks for the most part had no subprime exposure,
consumers weren't as leveraged as in the U.S. and, unlike in 1997,
most countries had built up large reserves and had their fiscal and
monetary houses in order.
With the benefit of 20-20 hindsight, that logic was flawed for a
few reasons. The first had to do with underestimating the damage
caused by declining demand from the U.S. market and ultimately from
Western Europe as well. Several Asian countries had, and still
have, exports as their main engine of growth. When exports
collapsed, their domestic markets were woefully inadequate in
picking up the slack and sheltering their economies from falling
exports. The next reason was the impact of slowing demand on
commodity prices and consequently commodity-exporting nations like
Brazil and Russia - a dramatic impact that continues to be felt.
Finally, the carnage on Wall Street hit every investor's wallet and
with it came extreme risk aversion. The impact of that risk
aversion was felt acutely by the countries mentioned above, as
capital fled their equity and debt markets and for the most part
went into the "safe haven" of U.S. government securities.
We are now at a point when perhaps the worst pace of global growth
decline is behind us, but nowhere close to a broad-based recovery
either. The U.S., Europe, the UK and Japan - to name just a few -
continue to struggle. It is very likely that GDP will continue to
fall in Q1 and Q2 virtually everywhere and the return to positive
growth in the second half of 2009 is far from certain. Even if
there is the occasional positive quarterly GDP print in developed
economies, the U.S will likely end 2009 with GDP contracting by 2.5
or 3 percent for the year. Europe and the UK could be somewhat
worse, Japan a lot worse and the prospects for growth in 2010 look
anemic at best for most of the developed world.
However, it is also clear that there is relatively greater
optimism in parts of the emerging markets world (once again,
largely Asia) and forecasts reflect that. There are mixed signals
from China in recent months. While it remains to be seen whether
this is the beginning of a sustainable recovery or just a temporary
blip, it is a positive sign. China's growth will probably slip to 5
percent for all of 2009, India about the same or slightly weaker,
but India should grow at 6 percent in 2010 and China possibly
closer to 8 percent. Countries such as Singapore, Taiwan and Korea
look set for negative year-on-year growth in 2009, but they are
projected to bounce back in 2010 as well, though not quite as fast
Is it realistic to expect some emerging market countries to
rebound strongly when the developed world remains mired in sub-par
growth, or is this another de-coupling myth? It is hard to be sure,
but on balance I think there are reasons to be cautiously
optimistic about growth in Asia relative to the OECD world.
Early in the recession, manufacturers around the world were caught
unaware and inventory levels surged. Since then, adjustments have
taken place and inventories are lean, which is a positive for Asian
exporters if demand picks up - and that is the rub. So far, demand
continues to slide, but when it does stabilize, it ought to be good
news for countries like Taiwan and South Korea that have been
especially hard hit. With the exception of the CNY, most Asian
currencies are significantly weaker as well and this will tend to
boost GDP and improve competitiveness. Reserves remain ample, which
is an encouraging sign and will help with the rebuilding effort.
Weak commodity prices may have hurt Russia and Brazil, but have
largely helped Asian countries - despite some recent firming in the
commodity space (including oil) prices are likely to remain
relatively benign for the rest of this year. It also appears as if
capital has started moving back into some of these markets - Asian
equity ETFs have recently seen a lot of new buying.
Finally, what I consider the most compelling reason. I believe
this crisis will force a global rebalancing. Countries that run
large, persistent deficits, like the U.S. and the UK, will be
forced to get their fiscal house in order. Consumers in these
countries will have to do likewise by rebuilding savings. That
combination implies general belt-tightening and de-leveraging,
which argues for weak domestic growth and somewhat weak trade
patterns. On the other hand, many of the surplus nations of Asia
have realized that they need to boost domestic demand and
consumption to reduce their dependence on exports and buffer their
economies from the next exogenous shock. As a result, we are
already seeing signs of increased spending from consumers in some
countries and consequently a growing share of GDP from domestic
consumption. In addition, regional trade is growing, while trade
with the OECD world is declining, which will reduce some of the
drag from weak OECD demand. If this plays out, we could see several
years of sub par growth in the developed world, while Asia and
other regions enjoy a more robust rebound.
A lot could go wrong with this scenario, including more turmoil in
the markets and fresh bouts of risk aversion. However, if it does
play out the way I think it will, the countries that rebound
strongly will be the first to face inflationary pressure, rising
rates and stronger currencies. The ones that lag will see little or
no inflationary pressure, rates on hold for some time and downward
pressure on their currencies.
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Revisiting Global De-couplingOctober 22, 2012 Posted by: Dave Bhagat
Finance is the art of passing money from hand to hand until itfinally disappears.
- Robert W. Sarnoff
In the early days of this housing and financial crisis, manythought that parts of the global economy might escape unscathed.This was said most often with respect to the BRIC countries andsome of the smaller Asian economies as well. The argument seemedcompelling in certain respects - after all, in most of thesecountries, banks for the most part had no subprime exposure,consumers weren't as leveraged as in the U.S. and, unlike in 1997,most countries had built up large reserves and had their fiscal andmonetary houses in order.
With the benefit of 20-20 hindsight, that logic was flawed for afew reasons. The first had to do with underestimating the damagecaused by declining demand from the U.S. market and ultimately fromWestern Europe as well. Several Asian countries had, and stillhave, exports as their main engine of growth. When exportscollapsed, their domestic markets were woefully inadequate inpicking up the slack and sheltering their economies from fallingexports. The next reason was the impact of slowing demand oncommodity prices and consequently...Read More