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Constructive Thoughts for the Day
Constructive Thoughts for the Day
Permalink : http://blog.nationmultimedia.com/kriengsak
Wednesday , October 7 , 2009
The direction for world economic recovery
Posted by Kriengsak , Reader : 617 , 15:34:01   | Category : Economy  
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Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, http:// www.kriengsak.com

     Recently, the governments of China and Japan convened a meeting seeking solutions to the world’s depressed economy. Their cooperation received the attention of the world community since the Chinese and Japanese economies are as big and powerful as America’s. So, can their cooperation bring recovery to the world economy, and how fast will it be?
 
     Thailand’s economy heavily depends on the world economy, thus to analyze the worldwide situation will aid understanding of Thailand’s economic recovery pattern. In my opinion, the pattern of worldwide economic recovery will be U-shaped, for the following reasons….
 
     The worldwide economic recession is L-shaped, but will not remain so From the second quarter of this year, many indicators have been slightly positive, with economic indicators in developing countries positive for the first time since mid 2008. In April 2009, a peak was reached for the first time in 11 months for the Bloomberg Professional Global Confidence Index, a survey of Bloomberg clients to assess their confidence in the world economy.
 
     Apart from positive trends for the US economy indicated by DowJones and Nasdaq, Federal authorities revealed in March that from the recent economic indicators of five out of twelve states, the economic situation had mitigated. For instance, there had been a decrease in non-agricultural employment by just 345,000 positions, less than the expected decrease of 520,000 positions, implying that the economic situation in US may not have been at its expected worst.
 
     As for the Chinese economy, some good signals were released in May. Morgan Stanley adjusted their expected GDP for China in 2009, from 5% to 7- 8%. The Purchasing Manager’s Index (PMI) successfully measured above 50 points in March, implying that Chinese consumers can still afford housing and vehicles. In addition, loan issuances in the first quarter of 2009 were as high as CNY678 billion, equal to those of the entire year 2008.

     We have also seen such unprecedented phenomena as the global community’s endeavour to begin international policy coordination in order to resuscitate the global economy in the not too distant future, just as happened in the Japanese economic crisis of the 1990’s.

     The worldwide economic recession will not recover in quick V-shaped form The US financial sector still has a problem and needs time to recover. The financial crisis has also destroyed both large and small businesses. Many large US corporations have faced bankruptcy, including General Motors (GM). In addition, 5,289 retail stores in the United States shut down from October 2007 – October 2008.  Since many sectors have been affected by the financial crisis, people have suffered through unemployment and, therefore, decreased purchasing power.
 
     Japan, the world’s second largest economy, has suffered similarly. In 2008, 12,681 Japanese companies declared bankruptcy to a total debt of JPY 12 trillion – twice that of 2007.  Because Japan also depends heavily on export, the current situation of decreased import demand will delay Japanese economic recuperation.


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comment 8
Kriengsak date : 07/11/2009 time : 13.59
http://blog.nationmultimedia.com/kriengsak

Thank you for all useful comments.
comment 7
stalingrad date : 10/10/2009 time : 00.39
http://blog.nationmultimedia.com/stalingrad

Hi, Acharn: Only had a chance to respond to your posting as I’ve been busy these last few days. Hope to read more comments from you especially on the future—of Thai politics and economic development—which you are expert in.

Yes, I agree that the global recovery would be U rather than L shaped, given the massive co-coordinated stimulus by the governments. We are in the midst of the workings of the domestic and international multipliers and the speed of the recovery depends on the various marginal propensities: to consume, invest, import, and that of the government sector. If one of the propensities is low, that of the government could be upped to compensate. Changing propensities take time and hence a U rather than a V recovery. But as time goes by the propensities will increase, especially in China, India, and BRICs etc. until at some stage we get to a state of “irrational exuberance’ where we run into another bubble. So predictable, these humans.

But now suddenly people are talking of a looming international financial crisis, mentioning a possible run on the dollar etc. But to me, with the real international economy developing steadily, taking up the excess capacities, it’s hard to see the dollar’s weakening that much. It seems an adjustment rather than a free fall is in the works. If you look at the American economy it is still a mean locomotive, and its fundamentals, including its human resource base is still very strong. Sure, the world is moving towards a basket of currencies idea, with less emphasis on the dollar, after holders got bitten by the consequences of the sub-prime crisis. But this is a healthy realignment. Gold might be added to this basket as another insurance, and hence its higher price premium lately.

I’ve heard about this kind of doom and gloom analysis about the dollar since 1971, and who is going to argue with me that doom and gloom is an industry, very profitable for those churning out its products. If you look at their predictions, none of them were accurate, and today we still see the dollar as a core international currency, mainly because the American economy is seen in the long term as an attractive proposition.

What of the recent march of gold prices? The more I think about it, the more I feel it’s a temporary rise, fueled in part by irrational fears of paper currency and partly by speculation, but more the latter. Look at yourself in the mirror, do you really see yourself switching away from currency to gold as means of exchange? In this age of globalization? Even dishing the dollar for some other currency is not rational, and indeed not wholly possible. So I’d expect gold prices to fall soon. Why is a subject of another posting. But in general the answer lies in what’s happening in the real economy. So we’ve got to see what’s happening in the locomotive countries and the news is not bad.

BTW, does anybody know who is buying the gold in the world market? Is it a few big players or the masses.
comment 6
netnapit date : 09/10/2009 time : 20.30
http://blog.nationmultimedia.com/netnapit

Hello, Dr. Kriengsak, I hope you are reading comments posted. On a personal basis, we've actually crossed paths a few times. I hope you are well and that Nation bloggers will be hearing from you more often.

As for the economic recovery, I don't have any doubts that the world economy is going to recover. It's just not going to be rosy for some years. I think we will see more mini-crisis happening. In other words, expect more volatility: quick dips, quick recoveries, and yet more dips, etc. Why? Because all of the world's economies are adjusting structurally. Adjusting to a weaker US economy and hence less reliable export market. Adjusting to the need to rethink their energy policies and how to start taking care of the environment. A rise in green economy thinking. Adjusting to an increasingly electronically interconnected world, which will also boost new areas of economic activities.
comment 5
Pomjuk date : 08/10/2009 time : 08.29
http://blog.nationmultimedia.com/pomjuk

c3: Yuri: Extacta mundo! It sounds like you are saying that the stock markets are the leading indicators. What are these indicators leading; the economic growth perhaps? If the US’s Gross Domestic Product starts growing again in the fourth quarter of this year then we can say that the leading indicators are correct, right?

Now the 64 thousand dollar question, all the economic stimulus programs those come out this year should have some effects on the economy in the first and second quarters of next year. What will happen after the first half of next year? Can the economy with over 70% consumption sustain jobless recovery, lost of jobs and shrinking income?
comment 4
expresso date : 07/10/2009 time : 22.32
http://blog.nationmultimedia.com/expresso

Whether it's an L-shaped or V-shaped, individual nations need to make appropriate measures for their countries. In my own opinion, I think China has been doing the right things - boosting domestic consumptions by using its reserve and establishing many programs to encourage local consumptions. I recently mentioned about the national singing contest. Just think about how much domestic businesses that it has generated in all sectors. Another one is educating people to visit the rural areas in a vast country and carry "one kilogram more" - bring books to the rural area. This is not a nationalistic move, rather, it's a program to encourage the people to understand and explore their own heritage. Coupling with such, provinces offer coupons and discounts for travelers from other places and not just for foreigners like Thailand often does. As a result many young people from the metropolitan not only spend their money within the country but have also learned more about their roots and appreciated how rural people live.
comment 3
Hermano_Lobo date : 07/10/2009 time : 18.25
http://blog.nationmultimedia.com/yurivelasquez

Kriengsak-

After the Crash of '29 there was a share rally. The World's economy did not hit rock bottom until 1934. Well we all know what happend after that.

I agree with Warren Brussee's analysis. The Depression will not bottom out until 2012/13. Recovery by 2020.
http://blog.nationmultimedia.com/yurivelasquez/2009/10/07/entry-1
comment 2
FelixQui date : 07/10/2009 time : 17.23
http://blog.nationmultimedia.com/FelixQui

Yes, welcome back.
comment 1
Ian date : 07/10/2009 time : 16.30
http://blog.nationmultimedia.com/anterian36

Well as one honorary member to another let me be the first to welcome you back. To understate the situation these are interesting (challenging) times for the world, for Thailand, the Nation multimedia group, and the Nation blogs.
Will it be truly U shaped, at times it seems very L shaped from where I sit.
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