Economic recovery may be imminent, but there is no consensus on the form it will take.
RBS chief European economist Jacques Cailloux said that after speaking to clients in Europe, ‘investors remain very negative on the prospect of a stable recovery’.
‘We conducted a survey among our investor base a few weeks ago, and the striking answer that came back from that was that about 70 per cent of clients are betting on the ‘W’,’ he said.
Respondents were not asked to give a reason why they believe a ‘W’ or double-dip recession may occur. But Mr Cailloux thinks the possible withdrawal of stimulus packages too soon could be one factor.
RBS’s position, however, is that ‘we are in a recovery phase on the global economy level and we don’t subscribe to the double-dip story. It’s true for the US, Europe and also for the rest of the world’, he said.
Besides citing figures showing sharp increases in global manufacturing PMI, world trade and euro-area IP, Mr Cailloux said an analysis of European labour statistics revealed that one single nation – Spain – contributed to 58 per cent of the rise in unemployment in the euro area in the past 18 months, skewing figures significantly.
RBS also said 100 per cent of this decline in Spain was attributed to temporary contracts. Important export economies such as Germany, on the other hand, contributed only about 2.5 per cent.
Still, Mr Cailloux tempered his optimism by saying that ‘a straight-line, stable recovery’ is unlikely and a weaker fourth quarter in the United States and Europe can be expected.
As for the US, RBS managing director and chief US economist Stephen Stanley says the consensus view is that there will be ‘sub-par’ recovery attributed to de-leveraging in the household sector and the ‘tight’ credit environment. ‘There are headwinds but not necessarily huge impediments to recovery,’ he said.
Elaborating on the ‘sub-par’ recovery, Mr Stanley said an RBS analysis of ‘par’ or average growth in the first four quarters of recovery after previous recessions, as well as peak-to-trough levels, showed a meaningful comparison can only be made with the recessions of 1973-75 and 1981-82, in which real GDP rose 6.2 and 5.6 per cent respectively in the first four quarters of the recovery. RBS estimates the change in real GDP over four quarters at the moment stands at 3.1 per cent. ‘This still leaves a lot of room for solid growth,’ Mr Stanley said.
While there was no survey of RBS’s US investor base, Mr Stanley does not foresee a ‘W’ – he expects more of a U-shaped recovery. Much of this is premised on the labour market, in which RBS estimates about 2 per cent growth over the next 12 months. Mr Stanley believes the US Federal Reserve could tighten monetary policy by the second half of 2010 but will be very conscious not to ‘nip the recovery in the bud’.
Merrill Lynch says the recovery in Asia is sustainable. ‘The key issue, in our view, is not the risk of a double-dip,’ it said in a recent report. ‘It is the need for Asian central banks to normalise macro policy through interest rate hikes and currency appreciation.’
Interestingly, Merrill Lynch also noted that some investors are ‘not convinced’. It said it was surprised to find in a round of meetings with US-based investors that they are ‘still grappling with an essentially unchanged question about Asian growth’, with doubts about the sustainability of the recovery and lingering fears of a double-dip recession.
‘Conviction levels are extremely low. If you think it’s out of consensus to be a pessimist, think again,’ Merrill Lynch said.
Source : Business Times – 13 Oct 2009
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