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Shorter booms, more frequent downturns

Shorter booms, more frequent downturns
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First Published: Tue, Apr 06 2010. 10 33 PM IST

Updated: Tue, Apr 06 2010. 10 33 PM IST
Is the crisis over then? Italian news agency ANSA, citing a draft of the International Monetary Fund’s (IMF) soon-to-be-released World Economic Outlook, says the world economy is expected to grow 4.1% this year, 0.2% higher than its last forecast. During the beginning of the last cycle, the world economy grew by 3.6% in 2003, so the 4.1% rate isn’t bad at all, though, it’s coming off a low base.
The stock markets, after a pause, are seeing a revival, thanks to increasing confidence by investors that the recovery is for real. They have weathered worries about the withdrawal of the fiscal stimulus and the Greek crisis. The double-dip is a forgotten nightmare. They’ve even begun to find good things in monetary tightening.
One reason is the upbeat data that’s been coming out lately. Global manufacturing growth, for example, hit a 70-month high last month, according to the Purchasing Managers’ indices. We’re finally seeing signs of job growth in the US. American consumption, too, has started to grow.
And the numbers out of emerging markets such as China and India have been consistently good. Crude oil prices, too, have started to move up. Growth has started to spill over into services too. A recent report by JPMorgan Chase sums up the mood succinctly: “A continued positive feedback loop between financial markets, confidence, and consumer and business spending will drive the expansion in 2010.”
Global trade has rebounded. India’s export growth numbers for February were excellent at 34.8% year-on-year (y-o-y). Moreover, growth in the emerging markets has been good for the developed economies. Barclays Capital’s Global Economics Weekly points out: “In March, the US ISM export index reached a 21-year high, while the euro area PMI export index reached a 10-year high.” US exports to China were up a huge 64.9% y-o-y in February.
So far, the consensus was that while the emerging markets would grow strongly, growth will be tepid in the developed nations, which are still struggling with the aftermath of the crisis. As the JPMorgan report puts it, “Ongoing household deleveraging, corporate caution and lingering banking problems in the US and Europe will keep the global recovery modest relative to the depth of the downturn.” That view is now changing. IMF, for instance, has revised its US growth forecast for this year from 2.7% to 3%. Recovery in Europe, on the other hand, is expected to be slower.
Few analysts predicted the swift recovery in the US. One institution that got it right much ahead of the others, bravely calling the recovery as early as in April 2009, was the Economic Cycle Research Institute (ECRI). In August last year, the institute forecast that the recovery would be the strongest since the early 1980s and the subsequent V-shaped rebound has proved them right. But Lakshman Achuthan, ECRI’s managing director, has recently brought out a report titled The Changing Cyclical Contours of the US Economy, which says that the growth rate of the leading indicators “is now in a clear downturn, pointing to an easing in economic growth starting soon”. That, says the report, is going to make for a much more interesting market in 2010.
But it’s not just the slowing in the US rate of growth that is a concern. ECRI believes that inflation pressures are stronger than commonly believed. But even that is not the main point they’re making. Perhaps the report’s most interesting forecast is that the current recovery will be different from the long expansions we have got used to over the past three decades.
Here’s its main thesis: “It is clear that the trend rate of growth during expansions has been falling for decades, with the 2001-07 expansion showing the lowest trend growth of all.” They say that this trend is very likely to continue. Moreover, they also predict that volatility is going to increase, simply because the days of “The Great Moderation”, which saw low inflation and low interest rates, are behind us.
This cocktail of higher cyclical volatility and lower growth during expansions, says ECRI, means just one thing: more frequent recessions. In other words, the expansion may be strong, but it isn’t likely to last long.
The report sums up its insights into three bullet points: Cyclical cheer, structural gloom; more frequent recessions likely to keep headline jobless rate cycling around high levels; death of buy-and-hold for stocks. Since recessions are associated with major bear markets, then if these become more frequent, investors will have their work cut out for them.
Emerging market economies, of course, have seen higher rather than lower growth in recent cycles. That’s because their growth has not been based on an unsustainable debt bubble, unlike in the US, though, the jury is still out on China. But as recent events have shown, their markets have not decoupled from the US.
The moral of the story is clear: Enjoy the cyclical rebound, but don’t expect the boom we had last time.
Manas Chakravarty takes a weekly look at trends and issues in the financial markets. Your comments are welcome at capitalaccount@livemint.com
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First Published: Tue, Apr 06 2010. 10 33 PM IST