Great Recession

9 April 2009

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The Great Recession We are facing a Great Recession, not a Great Depression This is thanks to a better-than-expected G20 London Summit, which helped to fix some broken parts of the global financial system However, the fundamental imbalance in the global economy has yet to be addressed Among the G20 achievements are commitments to work together, to fight protectionism, to recapitalise and reform the IMF, and to avoid competitive devaluation But the Summit failed to revive the WTO Doha Development Round, to secure more fiscal stimulus, and to address the global imbalance Going forward, risks remain from possible further shocks in weak spots like emerging Europe, and the impact of any second-round effects We remain confident that Asia will see a shorter and shallower recession than the West; while China cannot save the world, it will lead East Asia out of the recession and drive commodity prices higher Plus focuses on Asia, Africa, Middle East, FX, and Commodities, and highlights on Angola, China, Hong Kong, and Mexico Synopsis Fixing the global financial system, partly Overview: It is a Great Recession, not a Great Depression This is not a Great Depression. But it has been called a Great Recession. How great remains to be seen. It certainly is a deep crisis, the outcome of which will depend on the fundamentals, the policy response, and confidence. Two key factors contributed to this crisis. One was the imbalanced nature of the world economy. The other was a systemic failure within the financial system, explained by a host of factors. In the future, we need to see both a more balanced global economy and a financial system that works to support this economy. Asia: Resisting the temptation We see little benefit from competitive devaluation, but plenty of risks. The G20 communiqué serves as a platform for Asian authorities to coordinate FX policy, and we expect the Asian currencies to play an important role in adjusting global imbalances in the long run. Africa: The bigger picture The onset of the credit crisis and the gradual realisation of the full implications of the global downturn for African economies have given rise to much pessimism about the region's prospects. Downward revisions to growth forecasts - even this far into the crisis are becoming more frequent. An increasing number of sovereign ratings are on negative watch, with credit rating downgrades more probable than not. Middle East: GCC economic overview While growth is set to slow, living standards in GCC are generally high. Diversification and openness are positive developments. Despite the cyclical slowdown, medium-term prospects are positive. The region should be one of the first to recover, we believe. FX: The day the music died Foreign demand for US financial assets is weakening. The widening of the US fiscal deficit should outweigh the narrowing of the current account deficit. Global recession and deleveraging continue to support the USD. The USD should start to fall when global economic expectations bottom out.,while the KRW is likely to recover when the global financial crisis settles down. Commodities: Looking beyond demand weakness Commodity prices rose strongly in March, driven by a broad-based rise in risk appetite following the Fed's plan to adopt aggressive quantitative easing and the Treasury's Public-Private Investment Program. These, coupled with a stronger USD and some evidence of a recovery in China's appetite for raw materials, helped to lift commodity

Selected On-the-Ground reports: Angola: Dipping into reserves China: Masterclass: All men are created equal, and then stuff happens, Part I Hong Kong: The curious case of the USD-HKD peg, Part II Mexico: Mexico taps new IMF/US Fed swap lines Forecast tables

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OVERVIEW Gerard Lyons Chief Economist and Group Head of Global Research, Standard Chartered Bank, United Kingdom, +44 20 7885 6988, [email protected] We are not in a Great Depression, but a Great Recession Thanks to a better-than-expected G20 London Summit, some broken parts of the global financial system are being fixed However, the fundamental imbalance in the global economy has yet to be addressed A Great Recession, not a Great Depression Introduction This is not the Great Depression. But it has been called a Great Recession. It certainly is a deep crisis, the outcome of which will depend on the fundamentals, the policy response, and confidence. Here, in the wake of the London Summit, I focus on the policy debate. This analysis also draws upon a recent closed-door meeting of chief economists from the private sector I attended at the Bank for International Settlements (BIS) in Basel, and on the quarterly meeting of the Organisation for Economic Cooperation and Development's (OECD's) Emerging Markets Network in Paris. There are three parts: first, the G20 London Summit; second, the policy measures; and third, the present economic situation and outlook. To understand what is happening, it may be helpful to view current events as part of the shift in the balance of power from the West to the East. This shift is not happening overnight. It will take many years. But happening it is. And this not only has a bearing on the recession we are currently in, it also has huge implications for the type of recovery we are likely to see. Two key factors contributed to this crisis. One was the imbalanced nature of the world economy. The other was systemic failure within the financial system, explained by a host of factors. In the future, we need to see both a more balanced global economy and a financial system that works to support this economy. But to get from here to there is not straightforward and will take time. Even though there is a need in the future for a more balanced global economy, the key now is demand. Boosting demand, even if it delays the move to a more balanced world economy, may be better than the alternative, which could be an ever-deepening downward spiral. Equally, within the financial sector, it is vital to fix the parts that were broken, but not everything needs fixing. Many parts of the financial system worked well and, even in the parts that broke, there were well-run institutions that did not get into trouble. All of which suggests the need to differentiate, from both an economic and a financial-markets perspective, between the immediate outlook and the longer-term issues. 1. The G20 London Summit The London Summit of 1933 failed. Perhaps they needed Gordon Brown, Barack Obama, and Hu Jintao to be there. These three were instrumental, it seems, to the success of the 2009 London Summit. Some in Asia have even referred to it as the G2.5 Summit, with the focus on China and the US, and the UK seen as good hosts! The Chinese were proactive in the run-up to the summit, reflecting their desire to share - and to be seen to be sharing - the common agenda of mending the economic and financial failures. Of course, it was much more than G2.5. Although generally referred to as the G20 (Group of 20) meeting, it was even bigger than that, with 29 countries, groups of countries, and institutions represented around the main table. The all-inclusive nature of this meeting was welcome given the synchronised nature of the downturn. The very fact that this gathering was held was in itself a sign of how things are changing. There has been a growing need for global policy fora to give a