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Is Asian recovery for real?

Jul 21, 2009

Nobody seems to be too sure about a recovery unfolding in the global economy. For instance, in Asia, hopes of a recovery have once again started doing the rounds now that the Chinese economy has reported robust growth for the second quarter. What is more, optimism has been further fuelled by a better reading of economic progress in export-oriented economies of Japan and Singapore. However, no such positive signals seem to be emitting from the developed world which continues to be mired in a recession. And while there seems to be optimism with respect to the Asian economies, outlook for the global economy remains bleak. While many reasons have been cited as to why the global economic scenario will continue to be grim, the latest one is the problem of excess capacity. In fact, the World Bank has warned that the global economy will fall into a 'deflationary spiral' unless urgent action is taken to reduce high levels of excess capacity in the industry.

Justin Lin, who is the bank's chief economist, believes that there cannot be too much dependence on currency depreciation and exports to come out of this slump and a solution has to be thought of quickly to arrest the problem that will be unleashed by idle capacities everywhere.

The World Bank is not the only one with a gloomy outlook. Stephen Roach of Morgan Stanley is not too optimistic about the future either. Forget, the developed world, Roach is not gung-ho about the Asian economies either. He believes that the financial crisis is not yet over and there are many more write-offs to come. He says, "Seventy-five percent of the world's economies today are still contracting, and the biggest piece on the demand side of the global economy is the American consumer, who is dead in the water." And the rally in the stockmarkets is more a product of excess liquidity in the system augmented by stimulus packages rather than any marked improvement in either the fundamentals or the global economy.

If you take a look at the US economy, some economic indicators have risen for a third consecutive month signaling the possibility that the beleaguered economy could be emerging from the worst recession in five decades. However, what needs to be noted is that while the recession is not getting worse, which is indeed a positive sign, recovery is not going to happen anytime soon either. Thus, investors would do well to keep a vary eye on those who are unabashedly buoyant about the global economic recovery process and take a good hard look at the reasons underlying the same.


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