giovedì 23 aprile 2009

Keating: false Hopes of an Economic Spring

Da Foreign Policy

The List: False Hopes of Spring

By Joshua Keating Page 1 of 1

Posted April 2009

Five signs of economic recovery and reasons to be skeptical of them.

Spencer Platt/Getty ImagesU.S. BANK RECOVERY

Reason for hope: A number of major U.S. banks have posted huge profit numbers in recent weeks. Bank of America reported earnings of $4.2 billion in the first quarter; Wells Fargo reported a record $3.05 billion; and Citigroup reversed a year of crippling losses with a gain of $1.06 billion. Some have taken the strong first quarter numbers as a sign that U.S. efforts to stabilize the banking sector are starting to bear fruit. Bank of America’s CEO Ken Lewis hailed his company’s strong showing as “a testament to the value and breadth of the franchise.”

Not so fast: Few analysts are buying the banking recovery. The gains are due mostly to recent deals like Wells Fargo’s purchase of Wachovia and Bank of America’s purchase of Merrill Lynch, not to mention a fair amount of creative accounting. Recent shifts in accounting rules changed when a company is required to record the losses on a particular asset as permanent. Citibank was also able to record a loss of value of its debt as a gain because it could theoretically buy it back on the open market. The smoke-and-mirrors act has done little to allay investor fears about the solvency of the U.S. banking sector. Because of the $13 billion Bank of America has set aside to cover future credit losses, the company’s shares actually fell the day it announced its quarterly profit. Even Citigroup’s CFO has said, “We don’t see the light at the end of the tunnel.”



Reason for hope: In March 2009, China’s manufacturing sector grew for the first time in six months, according to the China Federation of Logistics and Purchasing. Industrial output was 8.3 percent higher in March than the year before and retail sales jumped 14.7 percent. The Chinese government is trumpeting the upturn as a sign that the world’s third largest economy is beginning to recover after a $585 billion stimulus package. Premier Wen Jiabao described the state of the economy as “better than expected” this week. Goldman Sachs has raised its growth forecast for China to 8 percent.

Not so fast: The numbers are disputed. Another manufacturing survey from a private brokerage in Hong Kong shows manufacturing continuing to decline in March. Unemployment continues to rise. And though the stimulus has succeeded in boosting domestic consumption, exports still account for nearly 40 percent of China’s economy. The coming months will be a test of the degree to which China has “decoupled” its economy from U.S. demand.



Reason for hope: Global equity markets have begun to show some signs of recovery in recent weeks. The Dow Jones Industrial Average is up 23 percent since early March, the biggest six-week gain since 1938. Asian markets reached a three-month high this week with the Asian Development Bank reporting signs of a “tentative recovery.” New stimulus aid led to a six-month high in the MSCI Emerging Market Index last week, and even struggling European markets have been posting solid gains as of late.

Not so fast: The market gains, particularly in the United States, seem to be way ahead of the fundamentals, with retail, production, and housing indicators all continuing to fall. Economists like the bearish Nouriel Roubini see the recovery as a “bear market rally” that will be reversed by new data like the soon-to-be-released “stress tests” on U.S. banks. The IMF predicts that financial losses could top $4 trillion next year and says that while the recent gains could be the first signal of a recovery, more coordinated government action is needed if they are to be preserved.



Reason for hope: On April 21, the closely watched ZEW institute survey of German investor confidence was released, showing huge improvement in analysts’ sentiments on the German economy. It was the sixth consecutive monthly increase in confidence. A growing number of economists now believe that a recovery is possible for the second half of 2009. European equity markets shot up on news of the survey’s release. Chancellor Angela Merkel this week said that increasing optimism among German manufacturers may be a sign that “we may be reaching the bottom.”

Not so fast: There’s still a lot that German investors should be pessimistic about. The government is expected to cut its 2009 economic forecast next week and is expecting a 5 percent contraction in GDP this year. Manufacturing orders in the world’s largest exporter were down 38 percent in February versus the year before, making further layoffs likely.



Reason for hope: The leaders who met at the G-20 summit in London in this month billed it as the beginning of the kind of international coordination that will be needed for a global recovery. Pledging $750 to the IMF for stimulus aid, they vowed to avoid protectionism and clamp down on banking havens. U.S. President Barack Obama hailed the summit as a “turning point in our pursuit of global economic recovery."

Not so fast: The summit fell short in a number of key areas. Because of U.S. objections to international financial regulation and European objections to national stimulus, there wasn’t much coordination promised in the end. Even the much-trumpeted crackdown on tax havens consisted primarily of a black list with exactly zero countries on it. There are also troubling signs that politics will continue to undermine needed international efforts on economic recovery. For instance, despite the fact that Latin America is one of the areas worst hit by the crisis, discussions at the recent Summit of the Americas were totally sidelined by talks about Cuba, hardly the central front of the war against the recession. As the IMF warned this week, much more coordinated global action will be needed and progress thus far has been frustratingly slow.

Joshua Keating is deputy Web editor at FP.

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