Recovery, Austerity and the Risks of a Double Dip

CHICAGO, July 9 /PRNewswire/ -- A video featuring Diane Swonk, chief economist of Mesirow Financial, discussing the July issue of Themes on the Economy® can be found at http://content.tvhouse.com/content/mf/070810/-123279070810/mf070810a.wvx and a copy of the report can be found at http://www.mesirowfinancial.com/economics/swonk/themes/themes_0710.pdf.

"After spending the last two months in meetings with economists and policymakers from the U.S. and around the world, we are seeing signs of a global recovery that is slowly emerging from the recession, with the developing world recovering at a much stronger rate than the developed economies, but with all economies still more fragile than anyone cares to admit," says Swonk.

"In fact, an earthquake that occurred while I attended a meeting in Mexico City served as an ominous metaphor for the lingering aftershocks of the recession. The result of this instability is that economists estimate the risk of a double-dip recession at just under 15 percent, and no one believes it is out of the question, especially for the developed economies.

"Moreover, government interventions – notably regulation and austerity programs – are more likely to suppress growth than promote financial stability, and financial reforms are being implemented on a piecemeal basis, which could encourage rather than discourage the kind of regulatory arbitrage that got us into this mess in the first place," Swonk adds.  

On the bright side, improved credit markets will continue to help the world economies move forward, and the equity markets, which have overshot on the downside, are also expected to generally recover over the next year or so. Any monetary tightening that we see is likely to be much more concentrated across the developing rather than the developed economies, where overheating is more of a concern.

"And while the world's economies stagger forward with their recoveries at different rates, in different ways and influenced by different factors, they all have one thing in common: China. The country is playing a pivotal role supporting exports throughout the world, and carrying the burden of growth in both the developed and developing economies. A big issue to watch is whether politicians – ahead of the November election – start posturing to impose tariffs on Chinese imports. This could trigger a more broad-based trade war with Asia and severely limit low-income households' access to cheap goods, particularly in the U.S."

Here is a roundup of the global economic outlook by key regions of the world:

The Developed World

• The U.S. recovery is expected to accelerate in 2011, but remain subdued given the extraordinary losses endured during the recession. Gains will remain unevenly concentrated in investment and exports instead of consumption and housing, which does not bode well for job creation or income growth.
• Canada is experiencing more even gains than the U.S., has avoided much of the subprime losses in its banking sector and, as a result, has been more successful in bringing unemployment down with fiscal and monetary stimuli.
• Europe is more uncertain than North America, especially in light of recent austerity measures and the debt crisis across Southern Europe. Its most troubled economies – Portugal, Spain and Greece – are expected to remain in recession in 2011.
• Japan emerged from recession faster than Europe and North America, with the primary growth driver being exports to China. Efforts to rein in the budget deficit and an ongoing (18-year) struggle with deflation, however, are expected to dampen growth again in 2011.
• Australia is one of the few developed economies to escape the crisis relatively unscathed, mostly because of its proximity to China and dependence on commodity exports. It also had more leeway to ease fiscal and monetary policy, which helped it support spending even as the rest of the economy slowed.

The Developing World

• Latin America is generally emerging from the crisis stronger than much of the developed world. Those countries that have pursued good macroeconomic (read: market-oriented) policies – Brazil, Chile and Mexico – are doing better than those with more populist orientations such as Argentina, Bolivia and Venezuela.
• Central and Eastern Europe economies are recovering faster and sooner than those of Western Europe, but not doing as well as other developing economies. Once again, exports are the primary driver with dependence on Western Europe rather than China.
• Asia's economies (ex-Japan) are the major drivers of growth around the world. China and India have been robust and are now at risk for overheating, as is South Korea. Central banks in those countries are starting to respond, which will slow growth relative to what we have seen, but is unlikely to derail their recoveries.  
• The Middle East suffers from a leadership void and an inability to stop the rise in fundamental extremism. Iraq is only slightly more stable, while tensions between Israel and the Palestinians have worsened. Despite continued talks about a two-state solution, a push from surrounding countries for a one-state solution may be gaining momentum. In the meantime, oil prices could move to $100 per barrel by 2012, and higher prices – above $150 per barrel – would constitute a full-blown oil crisis, adding insult to injury for a global economy still struggling to recover.
• Africa is beginning to show some potential as it recovers from the recession, aided by a snapback in commodity prices and robust demand from China. Indeed, if there is a silver lining to the global outlook, it is that the developing economies such as Africa are finally realizing some of their potential.

"As the global recovery inches forward, it is likely to lose momentum over the next year, and the risks of slipping into a Japanese-like deflation are possible, especially in light of the drag associated with increased financial regulation and more aggressive austerity programs in Europe. And if we do face a double-dip recession, there is little left in our fiscal and monetary arsenals to combat it; there are few places to go when interest rates are already at zero," Swonk adds. "In the meantime, no one is quite sure what will be left of the global economy if China suffers a major setback."

The July issue of Themes on the Economy® as well as archived issues can be found at mesirowfinancial.com.

Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, it is an independent, employee-owned firm with more than $37 billion in assets under management and 1,200 employees in locations across the country and in London. With expertise in Investment Management, Global Markets, Insurance Services and Consulting, Mesirow Financial strives to meet the financial needs of institutions, public sector entities, corporations and individuals. For more information about Mesirow Financial, visit its Web site at mesirowfinancial.com.

SOURCE Mesirow Financial