The qualified recovery

Oct. 12, 2009
It's the resumption of global economic growth that seems to have begun but that cannot be discussed without a host of qualifications.

Call it the qualified recovery.

It's the resumption of global economic growth that seems to have begun but that cannot be discussed without a host of qualifications.

Markets show signs of life. But unemployment lingers. Expansion is slow. Risks abound. So far, qualifications outnumber hopeful signs. After the crash of 2008, any improvement is welcome.

Instead of "hip-hip-hooray," however, the more reasonable response is "hip-hip, and get back to work." Or the job search.

Oil markets have been anticipating recovery since the price of crude scraped bottom at the turn of the year. Traders, when they're not arbitraging oil against the dollar, seem to be using equity prices as heralds of rebounds in economies and oil consumption.

They'll be right someday. For now, demand's still down from last year, and inventories and idle production capacity remain high. Until those relationships change, the crude price will be shaky. And they won't change until the global economy regains health.

Intensive care

If the economy isn't yet out of the hospital, it's at least sitting up in bed, according to the International Monetary Fund's new World Economic Outlook.

But it still needs intensive care.

"The global economy is expanding again, and financial conditions have improved markedly," say IMF Economic Counselor Olivier Blanchard and Financial Counselor Jose Vinals. "It will take some time, however, until the outlook for employment improves significantly."

IMF expects the global economy to expand by 3% next year, well below preslump growth rates. Last year the economy contracted by 1%. Manufacturing and inventory rebuilding lead the upturn. Other bright spots are gradually stabilizing retail sales, reviving consumer confidence, and strengthening housing markets, IMF says.

Growth is strongest in the developing world. Real growth in gross domestic product will approach 5% in 2010 for the group of countries IMF calls emerging economies. Last year, GDP for this group grew by 1.75%.

For advanced economies, IMF says, expansion will remain "sluggish," with unemployment rising, through much of next year. The year's GDP expansion for this group will be about 1.25%, compared with contraction of 3.5% in 2009.

IMF credits central banks and governments for triggering the rebound and suppressing fears about a worldwide depression.

Central banks slashed interest rates and took "unconventional measures" to inject liquidity and sustain credit. Governments launched stimulus programs and supported banks with guarantees and capital injections.

"Together, these measures reduced uncertainty and increased confidence, fostering an improvement in financial conditions, as evidenced by strong rallies across many markets and a rebound of international cash flows," IMF says.

The group points out, however, that "lower-tier borrowers" remain stressed and that "the risk of a reversal is a significant market concern."

Eventually, fiscal stimulus will subside, and inventory rebuilding will lose influence. Consumption and investment will have to sustain economic momentum, but they're slow coming back. So the recovery might stall, IMF concedes.

Also, governments might abandon accommodative monetary and fiscal policies—economic intensive care—"because the policy-induced rebound might be mistaken for the beginning of a strong recovery in private demand."

In fact, IMF warns, the "fragile global economy still seems vulnerable to a range of shocks." Risks include rising oil prices, a resurgence of H1N1 flu, geopolitical events, and resurgent protectionism.

While surprisingly rapid improvement in financial conditions raises hope that consumption and investment might recover faster than expected, the agency says, a longer term risk looms.

It's that public skepticism about bailouts of financial firms might limit support for financial restructuring and foster prolonged stagnation. What's more, the cure may yet poison the patient. "The greatest risk," IMF says, "revolves around deteriorating fiscal positions, including as a result of measures to support the financial sector."

Oil markets

IMF isn't the only group publishing forecasts about the global economy, of course. But its outlook drives oil market forecasts by widely watched analysts such as the International Energy Agency.

Last January IEA said it bases oil demand projections on demand forecasts by IMF, the intergovernmental Organization for Economic Cooperation and Development, and Consensus Economics, a London-based survey of 700 economists.

In September, IEA added 500,000 b/d to its demand outlooks for this year to 84.4 million b/d and for next year to 85.7 million b/d.

Both levels of consumption would fall below those of 2007 (86.5 million b/d) and 2008 (86.3 million b/d).

Hooray still must wait.

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