Is economy on her way of recovery?

Creative Commons License photo credit: laureskew

Recently we have been hearing media and papers talking about the recovery of economy. Is economy really on her way of recovery? Well, we have seen stock markets rally for more than a month. But we are still not sure yet if the bull market returns.

In fact, we are rather concerned when seeing people rushing back to buy stocks indiscriminately recently without looking at the global situation. Even the property market has becoming crowded for the past one month. Is Malaysian market really reaching the bottom? Are we totally isolated or immuned from what’s happening worldwide in the midst of the latest IMF’s forecast about year 2009 to be the worst global economy slowdown after world war two?

Restarting bull market?
To restart the bull market, banks need to be adequately recapitalised and willing to lend; even if they achieve that, it would also require consumers and business to return to borrowing. This morning we have just attended a seminar for small medium enterprises (SME) conducted by EON bank at Mutiara Hotel. The objective of the seminar was to encourage these small enterprises to borrow money again from banks so that banks can have a chance to tap on the funding channelled by government through its RM 67 billions stimulus packages.

While financial institutions and private businesses are yet to really utilise or benefit from the two stimulus packages, do you believe economy is going to turn direction now? Well, some people may say that stock markets are always 6 months ahead of the real economy. But wait…

Over the last two weeks we have seen a number of interesting items which would appear to give hope for a new global bull market and a number that do not.

For economic recovery and a new bull market
• Barack Obama said “Impressive efforts to boost the economy are starting to bear fruit even though recovery would cause more pain this year.”

• Ben Bernanke, Chairman of the Federal Reserve, said “The economy is no longer ‘falling off a cliff’.”

• CBI – “Worst of recession over.” Ian McCafferty, Chief CBI Economist said “The rate of contraction will moderate quite noticeably in the second quarter of this year.”

• “Germany could be nearing the bottom of its sharp economic downturn,” said Angela Merkel.

• Tim Geithner said “The large majority of banks had sufficient capital.”

Against economic recovery and a continuing bear market
• US industrial production, year to March, fell 12.8% – the fastest rate since the end of World War II.

• Eurozone industrial production in February fell 2.3% versus January and 18% compared to a year ago. The biggest decline since records began in 1990.

• Globally economic activity and employment continues to contract.

Although some of the recent data has been a little less bad and some even a little better, there are other developing problems which represent a significant threat to the economy and to asset values.

• According to Standard & Poor’s, this year, worldwide, there have been 68 defaults by global debt issuing companies, of which 35 occurred in March. Quite clearly it is serious that the rate of default is accelerating.

• The rating agencies are downgrading at a near record pace. More companies had their rating cut to junk in March than in any month since the Asian financial crisis of 1997. In March, 17 companies were downgraded compared to an average of six per month for the previous 12 months – acceleration.

Another burgeoning problem is the commercial property market and commercial property mortgages.

• In the US, first quarter 2009, vacancy rates at shopping malls rose 9.8%.

• In March, US banks seized 464 commercial properties, valued $7 billion – three times the number in December – more acceleration.

• Last year, US commercial property sales fell 73%.

• At the end of 2008, US office space, vacancies rose to 14.5% and is expected to worsen.
What’s coming towards us is truly daunting. The forces at work until 2007 that drove asset prices to ridiculous highs have ended and won’t come back for years to come.

• The pre-2007 period of share buy-backs and private equity funded by limitless and mindless lending has been followed by a period of equity issuance and a collapse of lending.

• The period of borrowing and spending has been followed by a period of saving and debt repayment.

• The willingness of banks to lend to anybody as much as they wanted, has been followed by a period of very tight lending – whilst their balance sheets remain weak, banks don’t want to lend, other than to the very best propositions. There is a growing lack of willingness to borrow by both businesses and consumers.

Martin Wolf, this week in a Financial Times column headlined “Why the ‘green shoots’ of recovery could yet wither”, asked: “Is the worst behind us?”

He answered: “In a word, No” – explaining – “The rate of economic decline is decelerating. But it is too soon even to be sure of a turn-around, let alone a return to rapid growth … Complacency is perilous. These are early days.”

He ends what is an enlightening article by saying “The brutal truth is that the financial system is still far from healthy, the deleveraging of the private sectors of highly indebted countries has not begun, the needed rebalancing of global demand has barely even started and, for all these reasons, a return to sustained private-sector-led growth probably remains a long way in the future.”

So what do you think?


About The Author


Coming from a humble little town named Tangkak in north Johor state of Malaysia, I am so lucky to have chances to learn and work both in Johor Bahru and Singapore - a conurbation with 6.49 million still fast growing population - since year 1996. Hope now I can have a chance to contribute back to the community by sharing what I see, what I know and what I learn in this wonderful place.

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