Trade is key to global economic recovery

Written by Thomas Soon
Monday, 10 August 2009 00:07

Commentary by Thomas SoonSENTIMENT has drastically turned around since the collapse of the global economy in the last quarter of 2008 — equities are up and people appear to be spending again on popcorn and cotton candy at the mega sale in town.

The global economy appeared to have bottomed in March and the pain of the equity collapse last October seems a still frightful but dim memory of days yonder.The question now is this: Just as a self-prophetic scare of recession can pull economies into one, as some quarters might suggest, can soaring confidence now lead economies out of one?The reality of the situation is that just as the developed markets dragged the world into recession, so shall they lead it out of the economic doldrums.

What we are seeing now in the global equities markets is an unprecedented distortion to the economic system created by the trillions of dollars in governments’ stimulus packages.As raised by analysts, what happens when the liquidity stemming from that distortion dries up? Asian economies risk another round of wealth destruction if equities collapse again, worsening what is already happening around the world.

Yet equities’ rise globally has presented a window of opportunity for economies to at least get domestic demand going again, which will help to increase demand for overseas goods.Governments and businesses must act while the iron is still hot. The need now is greater than ever to set aside protectionist measures and get international trade moving at a faster pace.

Trade facilitative efforts must be stepped up and cheaper-than-ever credit must be extended to exporters.Free trade agreements and rising intra-regional trade will help but growth will not return to where it was until and unless American consumers return to the level of spending of yesteryears.The fear is that the highly-leveraged American consumers and companies will still be putting off consumption and investments, at least for the next one year or two.

While a significant portion of the current stimulus has yet to be spent, economists are already saying that the United States will need another round of stimulus and by extrapolation, China too.Yes, the world is entering anew into the same vicious cycle that brought countries to their knees, by depending on US consumers.

Yet, this crisis presents an opportunity for the United States exporters too to reduce their own costs and prices of their goods and services.That will not necessarily worsen the country’s trade deficits, if higher sales volume can be achieved in emerging economies for their products and services.

Over the long term, globalisation is supposed to do that — equalising prices via supply and demand.In the meantime, international trade data will be keenly watched for the remainder of the year. It is only when demand keeps going up even after all the fiscal stimuli are spent that the world will see a sustainable recovery.

The good news for emerging economies, including Malaysia, is that intra-regional trade is on a growing trend. The bad news is no one knows for sure if that recovery can be sustained. Many pitfalls, including inflation, lie ahead. In the meantime, Asia will have to start thinking about reining in the equity rally.

The region’s economies will probably be the first to tighten interest rates.It may not be here yet, but the greatest threat in the medium term now is stock market bubbles — creating another round of even worse deteriorating demand than the previous one.

As things stand, equities look well valued judging from historical data and given the continuing uncertainties that lie ahead.For long-term investors receiving decent dividends from their stocks, the outlook remains the same — the globe will recover.

For the buy-and-sell investors, it is vital to keep in mind that while a significant portion of stimulus packages continue to work their way into the system, only rising international trade will see a sustained global economic recovery.