This is looking increasingly like a tale of two recoveries. Australia – through a combination of good luck and good management - is arguably better placed than almost any of the G20 economies. So a V-shaped recovery from the downturn (it didn't technically qualify as a recession) looks to be well underway. Certainly the Reserve Bank's move to raise interest rates is trying to guard against the possibility of accelerating growth that gives us an inflationary headache in the future. Based on the minutes of the last Reserve Bank meeting released this week markets are expecting that rates will rise again on Melbourne Cup day. There is no doubt that our trade relationships with China and India have helped cushion our economy from the worst of the global financial crisis. Their performance stands out from the rest of the world. In the teeth of the downturn it looked like the decoupling theory had proven a false hope but it has clearly been a powerful force in the recovery phase. Indeed the global recovery is being led by Asian economies. According to International Monetary Fund forecasts China, India, Indonesia and Australia are the only nations expected to show real GDP growth this year and we are clearly in fourth spot with the top three all showing growth figures above 4% this year. In a V-shaped recovery the key drivers are a surge in consumption, growth in housing prices and finance along with companies building inventory. So in a typical V-shaped recovery the personal savings rate falls and private debt increases with confidence. That certainly seems to fit the Australian scenario. House prices are strong and rising and consumer confidence has rebounded. But what about the world's largest economy the United States? It really was at the epicentre of the financial crisis and the recession has been deep and severe particularly in terms of job losses and the scale of government bailouts required to stabilise the financial system. In the US the leading economic indicators are suggesting a recovery is imminent and the IMF is forecasting GDP growth around 1.5% for 2010. But the question still to be answered is what type of recovery will we see? With such a deep recession typically the recovery line is more U-shaped. In other words the recovery is slower and more muted. The big difference between Australia and the US is not just the size of the government stimulus package but also the loss of jobs in the US has been dramatic. Recovery from that type of deep recession is driven by government stimulus – which the US Obama administration has provided – rebuilding of company inventories (which the economic indicators say is underway) and stabilisation of the financial system. But the major difference between our recovery and what appears likely in the US is that the personal saving rate will rise as US households rebuild balance sheets and reduce private debt. That means we cannot expect US consumers to drive the economic growth through debt. Given the high unemployment rate it may also mean that it is two to three years before the US economy is growing at close to its historical trend and is approaching full productive capacity. Indeed some US commentators are forecasting a "jobless" recovery. So we should be thankful we live and and trade in a region that is leading the way but we should not be expecting the US – which represents about 54% of the developed world's sharemarkets as measured by MSCI All-World (ex Aust) index - to follow a similar path. It is likely to be slower and perhaps with more pain ahead before the world's biggest economy recovers is full steam ahead.
18th-October-2009 | 
