Opinion

At last, recovery for the
developed world

After five years and several false starts, the rich world may have finally reached a milestone in its long journey to recovery from the global financial crisis.

A recent slew of upbeat data points to a synchronised rebound of developed economies this year as healthier consumers and firms join forces with continued central bank stimulus.

Leading the pack is the United States. Its housing market, the epicentre of the sub-prime mortgage implosion in 2008, has bounced back so sharply in areas such as southern California and Las Vegas that talk has surfaced of a new bubble.

Europe, which kept tripping up on its potholes of public debt, is also looking steadier than it has in years. The euro area officially exited its longest recession in the second quarter, boosted by stronger factories, exports and consumption spending.

While high unemployment and uneven performances are still an issue, the region’s better business activity is expected to spill over to Britain, where growth accelerated in the second quarter on the back of broad-based expansion.

While economic growth in Japan slowed in the April-to-June period, a weaker yen and rising domestic demand are boosting company profits and helping to finally defeat endemic deflation.

What all this adds up to is that developed economies will add more to growth this year than emerging ones for the first time since 2007, according to a report in the Wall Street Journal this week citing research by hedge fund Bridgewater Associates.

Why has 2013 proved to be the year of economic resurrection for the developed world? Two reasons stand out.

First, the US recovery is turning out to be the rising tide that lifts all boats. The prospect of improved demand from the world’s largest economy is supporting manufacturing from the euro zone all the way to Singapore.

“The external environment is really getting better, led by signs that US demand is picking up,” said Nick Kounis, head of macro research at ABN Amro Bank.

The US recovery, in turn, owes much to central bank boldness – the second key reason for the turning point occurring this year.

Apart from the US, most other major advanced economies have recently acquired new central bank governors, whose shock-and-awe tactics have jolted their economies back to life.

Europe’s Mario Draghi succeeded Jean-Claude Trichet, whose premature interest rate hikes halted a fledgling recovery in 2011. It was Draghi’s pledge last year to “do whatever it takes to preserve the euro” that finally got through to investors, who stopped pressuring European bond yields to crisis points.

Draghi’s words, of course, didn’t lift growth directly. Still, they have bought Europe’s governments time to cut budget deficits and make the reforms necessary to spark economic revival, in the process removing the uncertainty around the survival of the euro that weighed on global growth.

Similarly bold assurances are boosting the growth prospects in Japan and Britain, which have both changed central bank heads in the past 10 months.

Japan’s Haruhiko Kuroda unveiled more money printing, a first-ever explicit inflation target, and a steely determination to beat deflation and stagnation.

This month, Britain’s Mark Carney also made an unprecedented vow to keep interest rates low until the job market improves, as long as consumer prices and the financial system are stable.

The progress of advanced nations is good news for emerging economies in Asia and Latin America – where roaring growth has slowed on rising interest rates, tighter credit and weaker commodity demand – but perhaps not to the same extent as before.

Richard Hoey, chief economist of American bank BNY Mellon, expects that “improved economic activity in the developed economies should help stabilise the emerging country economic growth rates”.

Exports in China, South Korea and India returned to growth in July from contractions in June. China’s exports to the US and Europe rose sharply, “supporting the view that stronger advanced economy demand will pull up emerging markets”, says ABN Amro chief economist Han de Jong.

But there are also signs that the old model of developed-economy demand buoying emerging-economy growth may now be less effective in regions such as Asia.

One reason is the way the US recovery is shaping up. The world’s No.1 economy is benefiting from a surge in domestic shale oil production, leading to cheaper energy.

This, coupled with recession-depressed wages, is giving a boost to domestic manufacturing at the expense of foreign exporters.

American consumers are also not spending as much as in earlier recoveries, which means less demand for foreign goods. “While the US economy is on the mend, we note that the current recovery has so far been concentrated in less import-intensive sectors such as the housing market,” says Credit Suisse economist Michael Wan.

“As such, Asian countries’ exports, including Singapore’s, have not and will not benefit as much from the improving US outlook compared to previous recoveries, or at least not until 2014.”

The rebounds in Europe and Japan, while promising, are also not strong enough yet to translate into significantly more imports from emerging economies.

Meanwhile, other hurdles remain in the developed world. US Federal Reserve chairman Ben Bernanke will soon step down, leaving to his as-yet-unconfirmed replacement the heavy responsibility of easing the US economy off easy money. Europe continues to face an uphill task of painful economic reforms, while Japan is torn over a planned sales tax that could derail the nascent rebound.

Thus, while advanced nations are in the growth lead for now, they may not hold it forever. But as they gain momentum and help support emerging countries, the global economy is looking cheerier than it has for a long time.

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