Asia major
While economic recovery remains tenuous, China and India will lead worldwide growth, writes Sam Chandan Phd FRICS
The outlook for the global economy has brightened. Countered by unprecedented monetary and fiscal policy interventions, the financial crisis that had threatened to plunge the world into a second, broader Great Depression has abated.
The advanced economies, dominated by the United States, Western Europe, and Japan, are projected to grow at a slow but sustained pace over the next year. Developing Asia, including China and India, is projected to lead global growth.
Still, the nascent recoveries in both developed and emerging economies remain tenuous. Spillovers from financial market instability into real economic activity have dampened global production and pushed unemployment rates sharply higher.
As indications of a return to growth emerge, there is potential for missteps in the unwinding of stimulus programmes to derail a normalisation of global activity.
Modest growth for some
In the advanced economies, the recovery has depended inordinately on support from the public purse. Interventions have taken many forms, including direct government spending, easing monetary policy bias, and more creative forms of support for liquidity.
As credit constraints have eased, the importance of the latter has diminished somewhat.
In the United States, the Federal Open Market Committee – a principal channel for effecting monetary policy – has cited evidence of sustained improvements in economic activity, strengthening of financial markets, and an easing of job losses in explaining the sunset timetable of its myriad liquidity interventions.
Purchases of agency mortgage-backed securities and agency debt are set to conclude in the first quarter, as are various lending and credit facilities. The term asset-backed securities loan facility’s support for new commercial mortgage securitisation activity is expected to run through to mid-year.
Grudging recipients
The winding down of support for credit markets parallels the relative stabilisation of the banking sector. But it also reflects a withering of public patience with government interventions. On both sides of the Atlantic, bankers have faltered in the public relations management of new profit reports.
Many of the largest banks, among them both willing and grudging recipients of government support, have reported heady profits for the year-ended.
The disconnect between the performance of banks and the middling performance of businesses in other sectors of the economy has cemented the popular discontent with the handling of the banking crisis, and the disaffection with the banks themselves.
The most profitable banks’ attempts to fend off a public backlash, through reduced compensation ratios, charitable contributions and public demonstrations of circumspection, have failed to beguile a cynical and recession weary population.
A backlash that erodes Western governments’ capacities to enact stabilising and growth-oriented policies is a significant risk to the global growth outlook.
In a New Year’s policy address, International Monetary Fund (IMF) managing director Dominique Strauss-Kahn warned that a premature withdrawal of stimulus would increase the likelihood of a double-dip recession.
In its January update to the World Economic Outlook, the IMF asserts that “a premature and incoherent exit from supportive policies may undermine global growth and its rebalancing.”
Emerging economies at the fore
In contrast with modest expectations for the advanced economies – where risks from the convergence of stimulative policies and political realities are among the most salient issues – many of the world’s emerging economies have already returned to robust growth.
Across emerging and developing nations, the IMF projects that growth will accelerate to 6% in 2010, up from 2% in 2009. This compares favorably with a growth forecast of 2% in the developed economies, where the IMF cites balance sheet restructuring – by households, businesses, lenders, and governments – among the binding constraint to its baseline projections.
The headline projections for the emerging and developing economies conceal tremendous variation in the extent of recovery from the downturn.
The nations of Central and Eastern Europe, in particular, are expected to lag broader trends (see p28). China and India, on the other hand, are projected to lead global growth over the next year, expanding by 10% and 7.7% respectively.
In both cases, these projections reflect significant upward revisions from projections made a year ago.
More so than at any time in modern history, current growth trends in China and India are now buoyed by an emerging middle class and a resulting rise in domestic consumption activity. At the same time, the maturing of the Chinese and Indian economies presents a new set of risks to be managed.
In China, in particular, domestic investment in the residential property sector has inflated asset prices. An abrupt correction has the potential to strike at household wealth and confidence in ways that China’s policymakers are as yet unaccustomed to.
Global property investment
Persistent concerns regarding asset value correction and property fundamentals temper the global property outlook. In particular, a return to relative normalcy in the financial sector has not motivated an improvement in credit availability to the sector.
In the advanced economies, commercial property remains unduly constrained by an absence of well-functioning mechanisms for accessing credit and regulatory constraints on the resolution of distress.
While investor interest in the United States has increased as asset prices have fallen, market dynamics have conspired to limit activity. A paucity of transaction activity has hindered the process of price discovery.
Further afield, in developing Asia, activity has picked up to a greater degree in anticipation of more robust property fundamentals.
Sam Chandan PhD FRICS is president of Real Estate Econometrics and professor of real estate at the University of Pennsylvania
