Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Global Banking: Some Sectors Look as "Precarious as Ever" - 28th Oct 20
Silver Price Minor Dip Possible Before 2nd Major Upleg Starts - 28th Oct 20
�� How to Carve a Simple and Scary Pumpkin Face for Covid Halloween 2020 �� - 28th Oct 20
Gold Price One Last Dip Likely Then Major Upleg to New Highs - 28th Oct 20
Smart Money Is Going All-In On This New Gold Frontier - 28th Oct 20
Gold Stocks Still Correcting - 27th Oct 20
Gold and Crypto: Is This How Charts Look Before A Monetary Collapse? - 27th Oct 20
Silver's Coming Double Trigger Shotgun Price Explosion - 27th Oct 20
The $126 Billion Gold Opportunity in Australia - 27th Oct 20
Tips to Breeze through Your Spanish Classes Online - 27th Oct 20
Try The “Compounding Capital Gains” Strategy Today - 26th Oct 20
UK Coronavirus Broken Test and Trace System, 5 Days for Covid-19 Results! - 26th Oct 20
How the Coronavirus is Exacerbating Global Inequality, Hunger - 26th Oct 20
The Top Gold Stock for 2021 - 26th Oct 20
Corporate Earnings Season: Here's What Stock Investors Need to Know - 25th Oct 20
�� Halloween 2020 TESCO Supermarkes Shoppers Covid Panic Buying! �� - 25th Oct 20
Three Unstoppable Forces Set to Drive Silver Prices - 25th Oct 20
Car Insurance And Insurance Claims and Options - 25th Oct 20
Best Pressure Washer Review - Karcher K7 Full Control Unboxing - 25th Oct 20
Further Gold Price Pressure as the USDX Is About to Rally - 23rd Oct 20
Nasdaq Retests 11,735 Support - 23rd Oct 20
America’s Political and Financial Institutions Are Broken - 23rd Oct 20
Sayonara U.S.A. - 23rd Oct 20
Economic Contractions Overshadow ASEAN-6 Recovery - 23rd Oct 20
Doji Clusters Show Clear Support Ranges for Stock Market S&P500 Index - 23rd Oct 20
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Faltering World Economic Recovery?

Economics / Global Economy Oct 05, 2009 - 02:59 AM GMT

By: Lloyds_TSB

Economics

Best Financial Markets Analysis ArticleIt would be nice and easy to believe that the road to economic recovery is now clear and straightforward after the financial market crash of 2007-2009. Equity markets have had one of the best quarters ever, corporate and government bond yields have fallen sharply and spreads, in cash and corporate bonds, are narrower than at any time since the crisis gathered momentum in 2008. Economic growth has resumed in Q2 or Q3 of 2009 for most economies after a year of declines. Housing markets (US, UK, Spain, Ireland) are seeing a flattening in activity after the sharp falls of the past year or some modest up-tick. And manufacturing output is recovering from its lows in most countries. But there are some signs that the pace of the recovery is losing momentum and faltering. We look at some of these issues in this Weekly Report, starting with recent trends in financial markets.


How sustainable is the recovery in financial markets?

Financial markets have recovered but remain supported by record low interest rates and by money market operations of central banks that are offering liquidity virtually free. This is allowing banks to recapitalise, as lending spreads are still wide. Balance sheet restructuring is therefore going on – that is to say, reduction of liabilities and raising of new capital (some via equity issuance or bond issuance into stronger markets) – but still appears to have some way to go. One way of assessing this is that not all of the institutions that received public sector injections of capital have yet been able to pay it back. In addition, credit conditions are improving for businesses but spreads are wider and conditions attached to loans are tougher than at any time over the last decade.

Of course, financial market conditions are infinitely better than they were six months or a year ago but a clear and unambiguous path to recovery is not yet assured. The true test for financial markets will come when public sector support starts to be withdrawn, and private flows of funds have to replace central bank capital. Looking at the recent trends in manufacturing and other economic activity, however, gives us reason to think that this process will not be smooth nor should be undertaken too soon.

What about the recovery in economic activity?

There have been some tentative signs in recent weeks that the global economic recovery may not be advancing quite as strongly as the financial markets have been expecting. In the US and UK, manufacturing purchasing managers’ indices (PMI) posted a surprise fall in September. The weakness of these reports lends weight to the worry that the pick-up in developed countries’ manufacturing activity in recent months may owe more to the inventory cycle - and a reflux from the deep destocking that has occurred - and temporary car sale inducements, rather than any underlying and as yet sustainable fundamental improvement in final demand from consumers. Admittedly, in the Eurozone the manufacturing PMI posted a slightly stronger-than-expected rise in September although, at 49.6, it remains below the 50.0 level separating expansion from contraction. In some ways, September’s weaker-than-expected PMI surveys are a useful reminder that ‘all that glitters may not be gold’ in the manufacturing sector. Having indicated modest expansion in July after five consecutive monthly improvements, the latest PMI surveys may be a reality check in terms of firms’ inventory cycle. We may well be over the worst of the economic downturn, but there is not yet a compelling case for stockbuilding given the ongoing fragility of demand.

Overall, the emerging economies PMIs are showing that the recovery in manufacturing output levels is more vigorous from a higher trough than in the developed economies, see chart a. Highlighting this point is chart b, showing that PMIs in China and Singapore are well above those of the global average. In contrast, the PMIs in the US, UK and euro area are below the global average, and are showing stabilisation in output (near 50) rather than that any sustained rise is underway (above 50). Even the PMIs for services in the developed economies are little better - suggesting stabilisation and modest expansions rather than strong upturns. Recovery is occurring from the very depressed levels that private sector demand for consumer durables, housing, stocks and capital fell to. However, our view is that the after-effects of the financial market crisis and a desire amongst households and businesses to reduce debt will keep the recovery below the rates of expansion observed after previous downturns. Indeed, this is shown in the history of US recoveries from recession, with the consensus suggestion that the recovery after this downturn will be the weakest of any recession since the 1970s downturn, see chart c. Hence, the path to recovery in the US economy in the second half of this year and next, will be modest and potentially volatile.

Latest US economic data not encouraging for the pace of global economic recovery next year…

Latest economic data from the US seem to back up the view that economic recovery remains fragile at best. There was a plethora of disappointing US economic data last week (ADP employment data, Chicago PMI, ISM manufacturing). Finally, the September payroll numbers were very weak, -263k in September, versus a consensus estimate of around -175k. The unemployment rate, meanwhile, rose to 9.8% (in line with consensus) from 9.7% in August. Average hourly earnings increased just 0.1% during September, softerthan- anticipated by the market, chiming with the Fed’s statement in September which referred to ‘sluggish income growth’. Labour market conditions typically lag the GDP cycle, suggesting that the US economy is likely to strengthen only gradually in 2010. But the table shows that the US will still be the best performing of the major economies. Only the emerging countries will exceed its rate of growth, modest though it may be. Unsurprisingly, higher unemployment is probably the single biggest threat to a revival in global consumer activity. In countries such as Germany, this adjustment could be particularly sharp because, to date, government wage subsidies have led to a slower pace of labour market deterioration compared with other countries, see chart d. In the US, the labour market adjustment has been faster, and so may be the economic recovery, but it is also more painful.

…suggesting that a loose policy stance well be in lace well into 2010

The IMF said in its October report that: “The policy stance in the advanced economies should continue to support demand until the recovery gains a much stronger foothold. Against this background there is ample room to maintain very low interest rates and maintain unconventional instruments to counter adverse feedback loops between the real and financial sectors……Discretionary fiscal stimulus should not be withdrawn too early”. We think that the response to this IMF statement can only be, ditto. The recent good news has been a function of an inventory swing, better financial market conditions and the effects of fiscal stability programmes. Recent evidence suggests that it would be too soon to start withdrawing these measures now. This means that interest rates will remain low well into 2010, and that quantitative easing and other central bank support to financial markets will also be required.

Trevor Williams, Chief Economist, Corporate Markets

For more information: Emile Abu-Shakra Manager, Media Relations Lloyds TSB Group Media Relations Tel 020 7356 1878 http://www.lloydstsbcorporatemarkets.com/

Lloyds TSB Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules