Economic Recovery: Hope Has Turned into Expectation

by: TradingHelpDesk

Through Q4 2008 and Q1 2009 commentators and analysts were steadily downgrading their economic forecasts and pushing back deeper into 2009/10 their predictions for an economic recovery. However, early in March we saw equity markets fall to new lows, then rally on bargain hunting, and since then cautious optimism has gradually returned to the banking sector and wider economy.

Investors and economists increasingly feel there is light at the end of the economic tunnel and the bottom in the economic cycle occurred in Q1, or at worst in the current quarter. The unanswered question is will the global economy stabilise at current levels and provide flat to modest economic activity (an ‘L’ shaped recovery), or will the massive stimulus packages provided by G8 Central Banks spur the global economy into a ‘V’ shaped recovery accompanied by a new bout of inflationary pressures? Equity markets, particularly in the U.S., seem to be leaning towards the latter scenario with further gains made this week leaving the 2-month equity rally intact with improved risk appetite spreading from speculators to more mainstream and conservative long-term equity investors.

Ironically, the foundation for improving confidence is not a new, and surprising, trend of good economic news. It’s because certain key data announcements have not been as bad as predicted. In fact it’s near impossible to find any data releases year-to-date, outside of China, that even the most cheerful economist could describe as good but when expectations and investor morale is so low, as it was at the turn of the year, quite bad economic news particularly from the U.S., still the world’s most influential economy, is greeted with relief and a new bout of equity buying.
A perfect example relates to U.S. employment data, released on Friday, which indicated a further 539,000 jobs were lost during April, compared to a negative 590,000 consensus forecast. The figure, depressing by any normal measure was actually the best, or to put it more accurately, the least worst figure in 6-months encouraging commentators and even President Obama to articulate optimism that the recession was easing in its severity.
However, many of the upbeat commentators omitted to mention the data was flattered by a 60,000 temporary boost to U.S. government payrolls relating to contract workers employed for the 2010 census count. Nevertheless confidence is a crucial ingredient in any recovery and as long as the press and investors hold onto their cautious optimism we should see, later in 2009, stabilisation in U.S. housing market which will thereafter encourage U.S. consumers, the backbone of the U.S. economy, to return to what they do best; shopping.
In Canada, the employment news was also better than predicted with a small increase, 35,900, in payroll numbers. Closer to home, the European Central Bank cut Euro-Zone interest rates for the 7th time since summer 2008 reducing the cost of borrowing 0.25% to 1.00%, an all-time low. The European economy is highly likely to recover later than the U.S. due to the ECB being behind the curve on monetary easing but the latest rate cut is welcome nevertheless, though is widely viewed at best as ‘better late than never’.