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The past week has seen a further improvement in risk appetite and a strengthening of the consensus that the US and global recession is likely to be at an end. An official closure of the worst recession since the Great Depression will occur when the US releases positive GDP growth for the 3rd quarter and the latest US retail sales data implies a Q3 recovery is highly probable for the world’s largest economy. Both the Federal Reserve Chairman Ben Bernanke and the Bank of England Governor Mervyn King have articulated this view which matches the wider market consensus, with Bernanke stating “from a technical perspective the recession is very likely over at this point”.

Although the prospects for an imminent global economic recovery have jumped, growth is not evenly spread across developed nations and particular challenges remain. The strength and consistency of the recovery is still unknown, though the likelihood of a double-dip recession is easing by the week due to the determination of governments and central banks to keep monetary and fiscal stimulus in place for some months yet. Japan and the UK are likely to suffer a particularly difficult 2010 and face the obstacles of deflation and sharp tax rises respectively, though one common challenge persists across all developed nations: unemployment.

Unemployment will continue to be the single most stubborn anti-growth characteristic within developed economies and there is a noticeable paucity of economists who predicts the jobless rate will ease quickly in the US, UK or Continental Europe. The US unemployment rate, presently at 9.7%, looks set to reach 10% and linger there deep into 2010. This has implications for the sustainability of the recent retail sales recovery which saw consumer spending bounce sharply in August, up 2.7%. The impressive headline growth rate is worth further analysis. Spending relating to auto sales and parts shot up more than 10%, whilst spending relating to homes fell with furniture retailers 1.6% lower and garden supplies 1.2% weaker. Overall, despite the weakness in housing related retail sales, August saw the best growth in US sales since January 2006. With consumer spending representing around 70% of US GDP, a nation of confident consumers will be required in 2010 to compensate for the inevitable extraction of stimulus. High unemployment is clearly not compatible with strong and sustainable consumer spending and growth in 2010 is therefore likely to be sub-par.

Whilst many commentators anticipate weak growth through 2010, policy makers face a dilemma as the unprecedented amount of stimulus unleashed over the past 12 months, primarily by G8 nations, will create inflationary pressures across the global economy. The inflationary side-effects of this stimulus are already apparent in gold and equity markets. Both asset classes have enjoyed a sharp rally. The dollar has also reacted predictably, devaluing significantly since its cyclical high in Q1 2009. For the time being retail sector inflationary pressures remain relatively benign but that scenario is unlikely to persist if input materials; oil, food stuffs and other commodities continue to regain the attention of speculators who collectively, in the months preceding the recession, helped pushed oil to $147 per barrel and other commodities to equally unsustainable bubble prices on speculative inflows. Adding further fuel on the inflationary fire will be China with its legitimate demand for physical commodities creating further upward pressure on input costs.

Unfortunately for the consumer there is now possibility average wages will enjoy such inflationary pressures in the foreseeable future.

Source: Recession May Be Over but Unemployment Threatens Growth