Clarity is usually preferred over uncertainty – it helps keep things simpler. However, in recent months, uncertainty about the sustainability of global economic recovery has risen, reflected in the most recent downward revision of US growth. The effects of monetary and fiscal stimulus measures have run their course, and political dissatisfaction and turmoil have emerged. Market movements over this period have been reflecting this. While clearer data supporting resumption of the recovery is essential, all indicators are not weak. Now into the third year since the start of the crisis, reviewing what is working provides a progress indicator and more balanced perspective.
First and foremost, the financial system has been stabilized. As the source of the turmoil but also the backbone to economic growth, stability is important. While overall credit growth is minimal, outright reduction in lending has not been a significant risk. Capital ratios are mostly in-line with the expected increase. No new toxic asset classes have been revealed to further weaken earnings or balance sheets. Evidence of an upward spike in credit risk is weak and is unlikely to be fueled by current loan growth trends. In the US, substantial excess bank reserves are on deposit at the Federal Reserve, which now has additional tools to further manage them.
The Federal Reserve has and continues to respond to monetary, fiscal and financial sector conditions using all tools and powers at its disposal. Through timely response and considered implementation of new programs and solutions, it has been a key contributor to a more orderly de-leveraging of the global financial system. The Fed has effected its roles as the buyer of last resort. While time will ultimately judge the success of these programs, these actions have also meant that we are all some distance from the prevailing conditions and sentiment of two years ago.
The corporate sector is in good form. Most large corporates hold substantial liquidity on their balance sheet as they delay new investments in the face of weak demand. Furthermore, current interest rates offer the opportunity to modify existing debt structures and lower longer term funding costs.
After a number of years of gorging on debt, the private sector has been repairing its balance sheet for nearly two years. While estimates indicate this will still require at least 3 more years, it is a meaningful improvement in the sector’s flexibility and longer-term health.
Economic growth for many developing markets remains strong. Recent figures for India, Indonesia, Brazil and Mexico show favorable trends. Some of this economic growth has been bolstered through a coordinated resistance to raising trade barriers and similar counter-productive measures effected during the Depression. Outright currency manipulation is also not the tool of choice, though more improvements in this area would be welcome.
The size, depth and extent of this crisis dwarfs many previous events. It is abundantly clear that we have a significant number of problems (including record unemployment, low private demand, lack of credit growth), and solutions to this global financial crisis require global co-ordination (see article here). This has meant more time and complexity in crafting solutions and contributed to the overall uncertainty. Issues still remain to be resolved and solutions to some of these will prove as difficult as those of recent efforts. Hindsight shows that better options could have been implemented in some cases. But the human elements and political realities have been considerable and sometimes, intractable. Fortunately, progress has also been measurable.