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Saturday, 7 February 2009

Glimmers of hope as global recession deepens

Unemployment continues to grow across the globe, with no countries remains unaffected by the global recession. In the Unites States the unemployment rate reached 7.2 per cent in December, its highest level since 1992. This followed a loss of almost 600,000 jobs in the month, the largest drop in over thirty years. Unemployment will continue to rise in most countries for the majority of 2009.

Nevertheless for the first time in quite a few months the latest economic data has started to show some glimmers of hope. This is not to say that there has been a dramatic improvement in the global economy, but there are perhaps some signs that the rate of economic contraction is decelerating. Although this means that the economy is still shrinking it could be the first steps towards reaching a trough.

Earlier this week the Purchase Manager Indices (PMI) figures for manufacturing and services showed an improved economic environment in both the UK and Europe. It showed that manufactures were benefiting from lower input prices, whilst those in the UK were starting to be helped by the rapid weakening of the pound. Services in the UK and Europe were also buoyed as lower interest rates and government intervention increased the outlook for the sector.

Later in the week the US ISM survey of non-manufacturing businesses improved for the second month in a row. It indicated that business conditions were improving, despite new orders continuing to fall. The US PMI manufacturing survey also increased in the month. Again both indices were improved but implied further economic contraction.

It should be remembered that these figures are indicating changes in the month, and therefore it is dangerous to read too much into them. It should also be noted that the employment parts of these surveys continue to deteriorate, representing an acceleration of unemployment.

Nevertheless the stage is being set for what will be a long crawl back to positive economic growth. Inflation continues to fall in Europe and the US, giving policy makers the room to cut interest rates further or to use monetary stimuli such as quantitative easing. Falling inflation will also help to boost real incomes, whilst reducing the attractiveness of savings, providing a much needed boost to consumer spending.

On top of this, lower interest rates and rising unemployment will provide benefits to business. Although, banks remain unwilling or unable to increase lending to businesses, there are early signs that the bond market is starting to re-open (although at a high price), whilst some bank facilities have become significantly less expensive. In addition, being able to cut jobs has enabled some companies to reduce costs, increase productivity and adapt to the changing business environment.

A return to normal economic conditions remain a long way away, even positive quarterly economic growth is unlikely in a number of countries until 2010. However, should the latest economic indices continue to improve then perhaps we are seeing a light at the end of the tunnel. The tunnel is likely to be quite long, but now could be the best time to start preparing for the upturn.

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posted by Carl Malways at

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