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The Worst Might be Soon Behind but it’s a Long Way to the Good Times

There is good news from the Far East. The worst might be over for the Asian export powerhouses. China’s official purchasing managers’ index (PMI), which measures the activity of manufacturing sector by surveying companies for data on new orders and inventories, in March increased for the first time since last September.

The better news was that the index came in at 52.4 from 49 in February; any reading above 50 indicates that the manufacturing sector is expanding. This development was reinforced by Singapore’s March PMI which also moved up for the first time in six months, though the index is still below 50. Singapore is a near-perfect barometer for health of the global economy as almost everything it manufactures is exported and is home to the world’s busiest port.

It was also the first country in Asia to go into recession since the crisis started and was quickly followed by Hong Kong. Taiwan’s February exports were down, less than expected, 22 per cent from a year earlier but it was a substantial improvement from January’s 42 per cent plunge. South Korea too delivered an upside surprise with industrial production and business sentiment surveys. Vietnamese and Thai exports have also shown marginal improvements.

The uptick in exports was bound to happen. Take for example China’s 28 per cent drop in January exports and 26 per cent drop in February. If the same trend continued, China’s export would be close to zero by October. This of course, is implausible. The sharp decline also suggests that things are quite close to the bottom.

News from the Far West was also better. US new home sales rose (unexpectedly) in February. The record plunge in US home prices in January might have encouraged people with means to make purchases. Sustained improvement in the US home prices are critical for a quick recovery as it is the causal factor for the disaster the world is in. However, the positive development was overshadowed by unemployment figures. There are about 13.2 million (8.5 per cent) unemployed people in US, the most since 1948. However, that did not stop the Dow Jones Industrial Average registering its best four-week winning streak since 1993.

According to the Standard and Poor’s, the global markets turned around in March with 8 per cent gain.

If one believes that the stock markets are a leading indicator of economic activity, then the market participants are anticipating quicker-than-expected bottoming out and stabalisation of global economy as various bail outs, stimulus plans, near zero interest rates and increased public spending slowly start mitigating the effects of shrinking private sector.

Nonetheless, this does not mean that the hustle and bustle of the last few years would be back in 2010. Though the consensus estimate is for US economy to stop shrinking and begin the process of nascent recovery in the second half of this year, there are no signs of such hope in Europe and Japan.

According to the recently released report by the World Bank, a fragile recovery of global economy in 2010 is a possibility but it noted that unemployment will continue to increase in all countries till 2011. Normally, unemployment will continue to rise well after the recovery is underway as focus will be on cost efficiency through enhanced productivity. Unemployment never fell below 14 per cent from 1931 to 1941, even though 1933 was the worst point of the Great Depression. However, the risk is that mounting job loses might kill off nascent recovery by decimating consumer spending.

The Gulf Cooperation Council countries benefited enormously from the previous boom. But the high growth rate allowed inefficiencies to creep in. Productivity growth in the Gulf countries, especially in the non-oil sectors, has consistently been in the negative territory.

The process of restructuring and reorganisaiton will continue in this region until the companies here regain competitiveness.

· aruna@khaleejtimes.com