US recovery a flash of lightning?

Written by Joseph Chin
Wednesday, 07 October 2009 08:07

KUALA LUMPUR: Despite increased optimism that a recovery is taking hold, Standard Chartered Global Research sees a growing risk that the US recovery will look like a flash of lightning – a bolt out of the blue driven by short-term stimulus and restocking.

In a report issued on Tuesday, Oct 6, it said even in Asia, where the recovery is stronger, sustainability is still undermined by weak loan demand and poor infrastructure in many economies.

"At the IMF annual meeting taking place this week in Istanbul, we sense a possible tidal wave of controls and regulations. Such controls, especially those driven by a political agenda, may stifle banking and finance in the years to come," it said in a report.

Standard Chartered Global Research said another risk is the volcanic eruption brewing under the dollar. Fearful of a future crisis, many countries are keen to build currency reserves.

Meanwhile, mindful of the fault lines beneath the dollar exposed by the crisis, they are also keen to diversify away from the dollar. But there are not many alternatives – a dilemma that creates instability in the currency world.

"Challenges abound, but fundamentals will still make a difference," it said.

In China, growth momentum is spreading, especially westward. In India, growth appears to be understated by misleading trade statistics. Even in Taiwan, growth prospects seem to be improving, despite damage from typhoon Morakot. Upside surprises are also expected in Saudi Arabia and the UAE after their first recessions in a decade.

On the US, it said the US recovery may be a flash of lightning. It is past the worst, and a recovery is here, but it is vital to focus on absolute levels.

The world economy is just under US$61 trillion in size; the US economy is USD14.3 trillion. If the West is not booming, emerging economies cannot boom.

Standard Chartered Global Research said the emerging economies can grow, but this requires self-sustained, domestically-driven demand.

Although the next six months could be strong for the world economy as policy easing and inventory rebuilding feed through, beyond that, there are challenges.

Deleveraging still needs to feed through. Will this be a U-, a V-, or a W-shaped recovery? For the US, the recovery will more likely be a brief flash of lightning before the economy slips again.

"After strong near-term growth, the recovery may fade just as quickly. Firms in the West are more likely to seek out investment opportunities in the East," it cautioned.

Standard Chartered Global Research said the West may experience a jobless recovery, prolonging the adjustment phase.

International firms are more likely to invest in fast-growing markets in the East, probably adding to protectionist pressures in the West – and improving the chances of a U-shaped recovery in the East.