Global recovery to ramp up in 2011

Stock values and commodity prices may be on the rise, and there has not been a major bank failure in months, but it is still too early to say a global economic recovery is underway, according to one think-tank.

“Expectations of ‘green shoots’ haven’t been met,” says Nariman Behravesh, chief economist for IHS Global Insight. “They’re coming, but they aren’t here yet.”

Asset prices are returning to equilibrium, he says, as investors retreat from the T-Bill market and rediscover their appetites for risk.

“The financial environment is on the mend, and the real economy is starting to mend,” he says. He predicts a very modest global recovery in 2010, followed by more substantial growth in 2011 picking up steam.

Many leading indicators are pointing toward global recovery. Rising global interest rates spreads suggest that the real economy has bottomed out and that inflation is not a real threat.

Global new orders have flattening out, marking an end to declines. Consumer confidence is at its lowest point since 1991, but is starting to rise.

Growth in employment remains absent, but Behravesh points out that jobs growth is a lagging indicator, and will not rise until the recovery is well underway.

One cause for concern is the commodities market, which he calls “a bit of a puzzle.” The major exchange traded commodities, such as oil and non-ferrous metals, have seen price increases for the past several weeks. But there has been no corresponding resurgence in prices for non-exchange traded commodities, such as pulp and computer memory chips.

This points to speculation in the exchange traded materials, as non-demand forces appear to be driving prices.

“If commodities prices are being driven by non demand forces, they could be in for some trouble,” he says. “It could act as a headwind to the recovery.”

Another theory, reported last week, is that China is stockpiling vast quantities of key materials, such as oil and copper.

“There’s nothing evil about this, they’re just being smart,” he says, but the emerging economic giant may be running out of storage space, in which case commodity prices could decline when Beijing stops buying.

China was one of the first countries to show signs that its economy had bottomed out, but virtually all growth is driven by the central government, with consumers and business spending contributing little, according to Todd Lee, IHS’s managing director, greater China country analysis and forecasting.

Beijing has announced 4 trillion renminbi (or C$680 billion) in fiscal stimulus, with massive liquidity injections as well. Much of that is being spent on much-needed infrastructure, while the export-focused economy awaits recovery among its trade partners, particularly the U.S.

The U.S. is not expected to see much of a recovery before 2011, with unemployment remaining above 10% until then. Growth in gross domestic product will do no better than 2% until the final quarter of 2010.

(06/30/09)