True, America and China, unlike Europe, have pumped trillions in the economy to support demand. Their huge fiscal stimulus seems to be paying off. Problem is toxic assets still plague the US and EU financial systems, and a huge credit card default crisis lies in store, when Bank of America and others will be forced to acknowledge the extent of their losses  on finanical assets in their balance sheets. If consumer credit goes bust, the recovery just won’t happen, unless purchasing power is redistributed — by tax or strike — toward employees and lower social strata in America, Europe, Asia, and a new international monetary system, based on stocks of primary goods and on fixed, but adjustable, exchange rates, comes into being. Kaldor proposed it to the UN thirty years ago. It would provide a firmer anchor for the global economy than current international reserve currencies, and promote North-South economic realignment, since it would regulate the terms of trade between manufactured goods and agricultural and mineral commodities.

Don’t believe the hype: the recovery is NOT around the corner. It remains to be seen what will happen when, especially in Europe, the crisis worsens in late 2009 and early 2010: Anarchy in the EU?

Many commentators are suggesting that the recent data from the manufacturing, housing market, labor markets suggest that the ‘green shoots’ of an economic recovery are blossoming. While there do seem to be some signs of improvement, ie that the pace of contraction has slowed, the most recent data may still suggest that the global economic contraction is still in full swing with a very severe, a deep and protracted U-shaped recession.

Although the outlook for global manufacturing and service sectors is still consistent with a significant fall in global GDP, the pace of contraction began to slow towards the end of Q1, even in Europe and Japan which have lagged the U.S. and China. Globally, surveys suggest that the manufacturing outlook has improved from the freefall of the end of Q4 2008 and early 2009. Some emerging economies like China may now be experiencing expansion based on government investment, but those of most advanced economies remain well in contraction territory. In part, inventory adjustment following the sharp destocking could contribute to a revival in demand, but a real increase in end user demand needed for a sustainable fast-paced recovery could be far off.

Another necessary condition for a global recovery is a bottoming in not only the U.S. but also global housing markets. So far in most markets, housing prices seem far from their bottom and the outstanding inventory continues to be very high.

Moreover there is a risk that the increase in commodity prices might choke off a sustainable recovery if it weighs on industrial production and consumption. The recent increase in commodity prices, driven in part by an increase in Chinese demand for crude oil and other commodities, has contributed to an increase in the Baltic Dry shipping index. Yet, given the significant inventory in commodities like oil, prices might suffer renewed declines. Moreover although trade finance is no longer quite as impaired as at the turn of the year, global trade continues to be quite weak as evidenced from recent data from China, the U.S. and other countries.

Accompanied by the rally in stocks starting in March, the wide variety of central banks’ liquidity facilities have finally started to show clear effects in the interbank lending and money markets. Stress indicators such as the 3 month LIBOR-OIS spreads have narrowed significantly as well as the TED spread. The stock market rally extended also to the bond market with spreads receding significantly and junk bonds outperforming all other asset classes in the month of April. Is the worst over or have markets overextended themselves?

United States

Some green shoots emerged in the U.S. starting January and February 2009 providing relief to rest of the world that the global engine of growth, the U.S. economy, might be on the path to recovery.

Government transfer payments, public sector wages and holiday discounts boosted personal disposable income, consumer spending and retail sales in January/February. However, spending and retail sales are set to drop again in March. Optimism about recovery and tax cuts via fiscal stimulus have boosted consumer sentiment recently. But the rise in consumer spending witnessed in Q1 2009 might be unsustainable in the coming months amid hiring freezes (indicated by record high continued claims), slower compensation growth, stringent borrowing conditions, fading impact of lower energy prices and the need to increase savings to de-leverage and offset wealth erosion.

Auto plant closures and removal of temporary workers hired for government census might cause another spike in jobless claims and job losses in spite of some optimism in the April data. The ISM manufacturing index, industrial production and imports are also contracting at a slower pace since January/February as firms have been aggressively slashing inventories and conditions for trade finance have improved. But if sales continue to plunge, the currently high inventory levels will have to continue to fall sharply in the coming months, which will be a negative for U.S. trade partners.

Similarly, some stabilization in starts and rise in construction spending starting February/March signal that the supply side of the housing sector might be close to a bottom and will continue to move sideways for some time. The persistent high level of inventories though, implies that the adjustment in terms of home prices in the U.S. housing sector might continue until mid-2010, possibly at a somewhat slower pace.

Canada

With its fortunes tied to the U.S. which absorbs about 75% of its exports, Canada would seem a strange candidate for early green shoots, but there are some signs of improved sentiment.

Canada actually added jobs in April 2009 – albeit all in self-employment – but a breather from the sharp declines experienced from November 2008 to March 2009. Moreover, the descent of the Canadian housing market also seems to have slowed, at least temporarily due to seasonal factors.

Canada’s shift back from trade deficit to surplus in February and March though reflects a weak loonie’s dampening effect on imports rather than any revival of demand in Canada’s exports.

The relative soundness of Canada’s banks, which are still extending credit to households and businesses, does protect Canada from some of the woes facing other G7 economies but a recovery could be far off.

Europe

Just as the European Commission, the IMF, and the OECD revised down their 2009 forecasts to at least -4% after a dismal Q1 performance, Eurozone economic indicators are starting to paint a brighter picture starting in April.

In particular, German manufacturing orders rose again on a monthly basis thus corroborating the recovery signaled by business sentiment indicators. Similarly, both manufacturing and services PMI indicators recorded an increase although hovering firmly in contractionary territory.

The most upbeat indicator so far has come from the OECD’s 6 month leading indicator signaling that both France and Italy might have reached a possible trough in Q1. Already commentators are speculating about the shape of the recovery but important structural headwinds remain. See Green Shoots In the Eurozone? OECD Leading Indicators Turn For France and Italy

United Kingdom

In the UK, more and more analysts have suggested that the housing sector is bottoming despite the mixed signs shown by different pricing and lending measures. April Nationwide data showed that prices registered a m/m decline of 0.4%, bringing the y/y rate to -15% even as Halifax house prices fell by a bigger than expected 1.7% in April, returning the average house price to 2004 levels. The fall in house prices was still the smallest monthly decline since December, though.

On the economic activity side, April CIPS/Markit manufacturing PMI rose to a reading of 42.9, up from 39.5 in March. The index has now recovered substantially from the record weakness of November to February but remains firmly in contraction territory. Moreover, the services PMI for March, a survey of businesses ranging from banks to restaurants also increased. This increase, the fourth monthly rise again, continues to reflect contraction even if a less steep one. Even though the survey is bringing a slowing pace of decline in new business and business expectations, companies are still shedding staff at the fastest rate since records began in 1996. Retail sales for February were also on the downside while unemployment is at the highest rate since 1997.

Russia

Despite the recovery in commodity prices, there are few green shoots in Russia where the EBRD suggested that the economy might contract by -7% in 2009. Although Russia’s PMI has now risen to 43 in April, the contraction is already longer and more severe than during the 1998 financial crisis.

Moreover, the unemployment rate neared 10% already in March, and wage arrears suggest further job losses are to come, despite government support. The increase in commodity prices may alleviate the worst of the revenue deterioration but even at an oil price of $50-55 a barrel, Russia would draw heavily on its past savings (as it has already been doing) and in any case hydrocarbon output is falling. Meanwhile despite some reductions in external debts in H2 2008, vulnerabilities in the financial sector will weigh on growth even once the recovery at last begins.

MENA

As for the Middle East and North Africa, a region relatively less hit by the global financial crisis but vulnerable to tighter global and regional liquidity conditions as well as lower demand for its exports, some nascent green shoots appeared in the real estate and property sector as early as Q1 2009.

Continued price corrections in 2009 contributed to an increase in residential sales in Dubai as early as February 2009. Mortgage lending started to pick up slightly from a virtual standstill between September 2008 and March 2009. However overcapacities and a shrinking population suggest prices have further to fall.

More generally, MENA bank recapitalizations and increased government expenditure – together with a return of global risk appetite – are improving the liquidity situation.
The outlook for the MENA region in general and the GCC in particular, remains quite tied to oil prices, meaning that the recent correction in commodity prices have reduced the revenue and macroeconomic deterioration somewhat but economic output and credit growth will be much weaker in 2009.

In Israel, inflation started to pick up, bringing forward the possibility that the Bank of Israel might even begin tightening before the end of 2009. Consumer confidence also increased in April 2009 which may imply an improved outlook fro the Israeli economy. It is important to note that despite a contraction in Israel, overall MENA growth will likely be positive- a rarity globally.

Asia

Exports plunged between 20% to 40% y/y in ASEAN and Asian Tigers in December 2008 and January 2009 due to large inventory buildup in Asia and G-3 and the crunch in trade finance. But exports are now contracting at a somewhat slower pace across most countries starting in February 2009. In fact on a monthly basis, Asian exports improved in February and March.

Asian exports to China, a large share of which are re-exported to the G-3, are also recovering while Chinese fiscal stimulus might also be boosting domestic demand for Asian exports. This is clearly reflected in the industrial production data which has recovered in most of Asia starting February as their export destinations themselves had slower contraction in industrial production and goods orders. While exports and industrial output corrected again in a few countries in March, the trend going forward will be determined by the pace of inventory adjustment and demand stabilization in the G-3 and therefore in China. Also, as deleveraging by firms and consumers in the West continues and global recovery remains sluggish, Asian exports will continue to contract though most of 2009 and much more than during 2001 or 1997-98.

Japan

Has Spring sprung in Japan? Some are seeing signs of green shoots.

Industrial production rose 1.6% month-over-month in March (the first gain in six months), while exports were up 2.2%. Japan’s Economy Watchers’ Survey has picked up from its record-low in December 2008. Meanwhile, the government’s roughly $150 billion fiscal stimulus package, announced in April, is expected to provide a big jolt to the economy.

When you scratch the surface, however, these green shoots seem like nothing more than flights of fancy. Industrial production may have risen m/m in March, but production was still in freefall in y/y terms, dropping 35%. And while most analysts agree that the fiscal stimulus package will boost growth, most see this as only a short-term phenomenon.

Exports, production and capital expenditure have collapsed and the seeds of recovery are not yet visible. Given Japan’s anemic domestic demand, most analysts agree that economic recovery depends upon the future course of Japan’s exports. That means a recovery will depend heavily on an upturn in overseas economies or a restructuring of Japan’s domestic economy.

China

So far, China may have some of the most persistent green shoots as the government’s investment program and massive credit extension are leading to a q/q acceleration of growth from the near stall of Q4 2008 and Q1 2009. The most recently released OECD composite leading indicators suggest Chinese output may have reached a trough in March, rising the most of any of the OECD and non-OECD economy the organization tracks.

China’s PMIs have risen above the 50 threshold indicating that the manufacturing sector may now be expanding, job losses seem to have slowed, and credit extension may be financing investment rather than merely plugging balance sheets. The residential property market is also finally showing signs of improvement at least in transactions volumes and the erosion of the large inventories and property investment rose slightly in April. Industrial production has improved from the negative growth in January, but could slow from the 8% level attained in March, especially since electricity demand continued to contract in April.

Moreover, it remains uncertain whether China can stimulate sufficient domestic demand to shift away from exports and export-oriented investment particularly at a time of external weakness and still impaired credit conditions. If it does not, the increased production could further contribute to overcapacities and disinflationary pressures at home and abroad. Consumption began to slow towards the end of Q1- albeit only slightly – despite vouchers to boost spending. Absent increased government spending on health, pensions and other social spending, the structural incentives to save and not to consume will remain. See Has The Chinese Economy Bottomed Out?

Korea

Korean GDP growth barely missed a technical recession in Q1 2009 by inching up 0.051% q/q (but shedding 4.3% y/y) after plunging in 5.6% q/q in Q4 2008. The Q1 rebound was signaled by the electronics sector, which drove a revival in industrial production and exports. Private consumption rose 0.4% q/q and construction rose 6.1% q/q in Q1 2009 – both with the help of fiscal stimulus packages. Net exports were positive as imports dropped faster than exports. Korea’s ‘green shoots’ may just be a technical recovery, with the pace of economic contraction slowing but economic activity stabilizing at low levels. Restructuring has further to go – Korea still needs to whittle down its excess inventory of houses and ships and clean up bank balance sheets.

A true recovery in Korea would require domestic consumption to revive not only on pent-up demand but on a more secure income and employment outlook. Retail sales got a lift from tourists taking advantage of a weaker won earlier this year but the won’s recent appreciation and a bear market rally in Korean equities has turned the tables in favor of domestic spenders. According to a Bank of Korea survey, consumer sentiment leaped in April along with asset price expectations. A key question going forward is whether Korea can sustain the domestic demand rebound when credit continues to contract.

Bank loan growth slowed to 8.4% y/y in March 2009 as banks tightened lending standards in anticipation of asset quality deterioration and the looming suspension of FX derivative contracts, which may weigh on bank earnings. A domestic credit crunch remains a risk even though the Bank of Korea has lowered its Base Rate to a record low 2% because many banks fund themselves through bonds at higher rates and economic concerns have elevated the yield on corporate bonds.

Latin America

It is quite fair to say that so far in the Latin American region there is limited evidence of a sustained recovery and in some cases the reality is actually of a still deteriorating outlook either due to the strong inertia of the global economic crisis and the deleveraging process or due to specific events such as the swine flu in Mexico.

In Brazil, the latest data on industrial production definitely showed improvements on the margin. March industrial production was up 0.7% m/m s.a., pushing the y/y rate up from -16.8% to -10%, mainly driven by a sharp increase in the production of automobiles. In fact, the tax cuts given by the government to boost auto sales have been quite successful. But the recovery is not widespread throughout the economy. Retail sales surprised on the upside in January but the downward trend resumed in February and more deterioration is expected in March as the labor market brings signs of continued deterioration.

In Chile, the latest economic activity data showed a -0.7% reading in March, which was above estimates and surprising in light of the poor mining, industrial production and retail sales results. Copper prices, Chile’s main export is up now by more than 35% YTD, largely because of an increase in exports to China and could be a trigger to further improvements in activity. The central bank of Chile has been the most proactive within the region, slashing rates by 7 percentage points so far in 2009, with more cuts expected. Thus, both monetary and fiscal accommodation should certainly support a quicker and stronger recovery in Chile, despite the fact that so far those signs are still mixed.

In Mexico, analysts recently revised their growth estimates once the own government’s estimates were sharply reduced (from -1.8% to -4.8% for 2009). Furthermore, economists are trying to calculate the impacts of the swine flu on the country’s economy which could subtract of -0.5 to -1.0 percentage points from GDP depending on how long the flu affects the tourism and entertainment sectors. The latest economic activity indicators have failed to bring any signs of recovery so far and the overall sentiment seems to be of a relatively far bottoming of the economy. The economic activity indicator from IGAE declined by 10.8% y/y in February, worse than expected as all components contracted but it did expand on a seasonally adjusted month-on-month basis.