As governments cautiously withdraw their support programs, the global economy is expected to continue on a slow and bumpy journey to recovery in 2010. Asian economies, with the exception of Japan, and many commodity-rich countries are in the strongest position and are leading a global growth dynamic.
In its quarterly Global Economic Outlook, Societe Generale notes that the outlook for 2010 global growth has gradually been on the upswing since last spring. SG says the upturn has coincided with market gains, although the cause/effect is not at all straightforward, and both are reacting to updated information.
The major impetus for gains in activity has been inventories and trade, says the SG report subtitled "Recovery 2010 - Now comes the hard part." Businesses globally reacted swiftly to the financial crisis and weaker consumption trends by shutting down production and cutting inventories.
"Despite the improvement, there are deep uncertainties on whether the economy can sustain gains without the massive fiscal and monetary support that have been put into place since the Lehman Brothers bankruptcy," says the SG report. "Eventually, a healed economy can walk without these crutches, but the first steps can be tentative. We expect a modest recovery that is likely to experience a few bumps as policy supports are withdrawn."
Meanwhile, SG notes that 2010 marks the beginning of the "exit odyssey" for central bankers and the markets. It explains that too early a withdrawal, policymakers could trigger an economic relapse. Too late, and the risk of longterm inflation and new asset-price bubbles intensifies. "Of course we expect near-perfect timing from our central bankers, but the risks are to err on the side of caution, and therefore be late in withdrawing liquidity from the financial system. Such a bias could support markets, but raise long-term inflation concerns."
Asia: Driver of Growth
SG notes that domestic demand in Asia is expected to surge in 2010, sustaining the region's recovery and bolstering global economic growth. SG says the rebound in the Asian industrial production is remarkable relative both to exports and historical experience.
"Domestic demand is strengthening in Asia independently of external demand. This is not decoupling; it is even more profound than that. The causality of coupling has switched. The delta in Asian growth now drives the delta in global growth," stresses the SG report.
SG says China will also support global growth through the dissipation of its trade surplus over the course of 2010. China is in the midst of an import-intensive growth cycle (infrastructure and investment spending should continue to suck in raw materials and basic capital equipment). As China attempts to offset a constrained western consumer with a massive frontloading of planned infrastructure work, China will move into the unfamiliar territory of imports outstripping exports by a wide margin. "Over the course of 2010, we expect that surplus to be exhausted and China's trade balance to flip into deficit," relates the SG report.
After posting a cumulative trade surplus of US$300 billion in 2008, SG expects that surplus to shrink to around US$190 billion for 2009 and slide into a full-year deficit of US$100 billion for 2010.
Meanwhile, inflation in the immediate future looks quite low, says SG, explaining that excess capacity in most economies contributes to downward pressure on core prices.
"Inflation expectations have stabilized for now and are highly uncertain, given dramatic changes in policy ahead," states the SG report. In the longer-term, a late start by central banks in withdrawing money and high fiscal deficits suggest upward inflation risks. Thus, policy efforts need to balance these risks. With short-term dis-inflation risks and longterm inflation risks, successful monetary policy steering is all about timing, stresses SG.
"As we end 2009, we can see that we were too conservative regarding the amount of growth that could result from an inventory upswing, and even today, inventories may be still an underestimated source of growth for the global economy," concludes SG. "The good news is for late 2009 and early 2010, when the positive momentum could propel growth targets higher. Unfortunately, sustainability questions plague the longer-term view."