Opinion: It's Not Over Yet

A quick and painless recovery is unlikely, as delayed effects of the economic crisis have yet to kick in.

Date Posted

1 Jul 2009


Issue 6, 14 Jul 2009

There is now growing optimism about economic prospects. We have seen economic news improving in recent weeks, not just in the US but in China and other parts of Asia as well. This has been complemented by signs that governments are making headway in getting their financial sectors back on track. In the US, “stress tests” have been carried out and produced results that were better than expected, implying that most major banks in the country can return to solvency with a manageable amount of capital raising. All this good news has sparked off a sizeable rebound in global equities. The question is—how sustainable are these improvements in the global economy and their subsequent stock market rallies?


Despite some definite progress, my view is that there is still a lot more bad news to come.

First, the best economic lead indicators we have—those that predict what will happen to global economic activity in six to nine months—tell us that output will continue to fall for some time more. The Organisation for Economic Cooperation and Development has composite lead indicators for all the major economies of the world. Significantly, their indicators point to high risks of further downside for all the countries they look at, including China.

Second, the financial sectors of major economies such as the US and Europe remain in a parlous condition. Even with the gradual recovery in credit markets, financial sectors remain some distance away from re-starting their critical function of providing capital and liquidity on a sufficient scale to support economic growth. Vital parts of the financial resolution— re-capitalisation of the banking sector and disposal of bad assets—are progressing but only slowly.

Third, if economic activity is going to continue to fall and if financial sectors have not returned to strength, then we are likely to see more financial stresses. As unemployment continues to rise in major economies and as cash flows in the business sector remain constrained, bad debts must rise. In the US, the outlook for commercial real estate looks particularly bad. The International Monetary Fund (IMF) has estimated that the global crisis will induce financial sector losses of US$4.05 trillion in the US, Europe and Japan, of which only about a third has been recognised. Of this extraordinarily large amount, US$2.7 trillion of losses are expected to be in the US alone, although some economists are estimating US losses at US$3.6 trillion. The scale of these likely losses throws some cold water on the optimistic findings of the US bank “stress tests”, suggesting that more financial stresses are likely as we move to the end of this year.

If emerging market risks rise, investors will become warier of Asian emerging markets, even if their fundamentals are better.


In essence, the global recession is unfolding in such a way as to produce more shocks which could hurt Asia. One area of concern is the emerging markets in Europe and the Middle East. Several countries in the Baltic region as well as south-eastern Europe are on the brink of a crisis. While timely intervention from the European Union and the IMF will probably help prevent a crisis on the scale of the Asian financial crisis, we are likely to see considerable financial stress in these economies. Since western European banks have been the major lenders to these economies, there will also be knock-on effects on the more developed countries of Europe. If emerging market risks rise, investors will become warier of Asian emerging markets as well, even if their fundamentals are better.

In addition, we should also expect delayed effects on the rest of the world, especially in developing countries. For instance:

  • As the recession spreads, major importers of foreign workers such as Dubai, Taiwan and Malaysia are cutting back on visas for foreign workers. Consequently, remittances sent to families in countries such as India, Pakistan, the Philippines, Indonesia and Bangladesh are likely to fall in the later part of 2009. For Bangladesh and the Philippines, the consequences could be very worrying since remittances support around 10% of GDP.
  • Another example of a lagged effect is the impact of falling commodity prices. Currently, many rural households have not cut back their spending very much because they still have savings from the commodity boom to live off, but this buffer is eroding quickly.
  • Another example would be the effect of corporate sector adjustments to the slowdown—hotel and tour operators are cutting prices and so are pressing their workers and suppliers to cut wages and prices as well. In manufacturing, workers are being laid off; in China, Thailand, Indonesia and other countries where rural-urban migration is substantial, remittances from urban migrants to their families in the rural areas are likely to fall, causing rural demand to slow.

As the economy stabilises, the costs of policy responses to the crisis will become more evident.


Several aspects of the current slowdown make a comfortable exit from the crisis more difficult.

First, unlike the downturns in 2001–2002 or 1990–1991, this is not a normal recession in the large economies. This recession is the product of a massive blow-out in the financial sector and is global in scale; hardly any reasonably sized economy is immune to its impact. Detailed studies of previous economic slowdowns show that those caused by such financial shocks take a much longer time to turn around.

Second, simply because of the sheer magnitude of the financial crisis we have faced, the policy responses have also been commensurately massive. The risks were so great that policymakers were prepared to take measures that go well beyond what they would normally consider to be prudent. As the economy stabilises though, the costs of these gigantic policy responses will become more evident. The deterioration in fiscal positions in major economies will be difficult to reverse. The monetary expansion has been of unprecedented scale as well—removing this monetary accommodation at the right time and pace will involve much skill. The risk of failure here is a surge in global inflation. If the US policymakers do not move as quickly as their counterparts, the implications for the US dollar would be very bad.

This means that, even as the global economy recovers, new risks will emerge. For policymakers in Asia, the implications are clear—expect and be prepared for more shocks.


Manu Bhaskaran is Partner and Head of Economic Research at the Centennial Group Inc, a Washington D.C.-based strategic advisory group. His major area of research interest is the Singapore economy and the policy options it faces. He is concurrently Adjunct Senior Research Fellow at the Institute of Policy Studies, Vice President of the Economic Society of Singapore and a Council Member of the Singapore Institute of International Affairs. Prior to his current positions, Mr Bhaskaran worked for 13 years at the investment banking arm of Societe Generale as its Chief Economist for Asia. He began his professional career at Singapore’s Ministry of Defence, focusing on regional security and strategic issues.

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