The big issues for 2010

There’s no question that 2009 was the year of the GFC. But interestingly, just as some were ready to declare that a new Depression was upon us, the global economy bounced back. We can thank the aggressive stimulus applied by Governments and Central Banks. We can also give thanks to China – the global rebound wouldn’t have occurred without China’s four trillion yuan stimulus package.

China has come from being an interesting sidelight to the subject of dinner party conversation. And this is just the start. The real question is when China will pass the US as the biggest economy in the world. It will happen in the next decade, but if China continues to expand at a near 10% annual pace, it could happen much sooner.

Economic debate always tends to extremes – and 2009 was a case in point. Depression didn’t happen and neither did deflation. The point that seems to be lost on many analysts is the role that globalisation now plays.

When the US turned down, across the rest of the globe – almost simultaneously and collectively – confidence levels dried up. People stopped spending, businesses stopped investing – the fear response.

But once US financial conditions stabilised, confidence in the rest of the world rebounded – especially in Asia, which was fundamentally in good health before the crisis. And that’s the rub. The US financial crisis became a global financial crisis because of globalisation and the fear response. Once the problem was isolated, then the rest of the world got on with business.

Moving into 2010 the chief risks relate to the US: high unemployment; its ability to grow without props provided by the Government and central bank; the commercial and residential property markets; the world’s preparedness to buy US debt; the path of the US dollar. And that’s just the top-level factors.

For Europe and Japan it’s the absence of growth drivers that is the main concern. But for Asia and even Latin America, the outlook is more positive as emerging nations seek to bridge the gap with advanced nations. And that gap is indeed closing.

BIG ISSUES FOR 2010

The shape of economic recovery

A few months ago the general assumption was that the global economy would recover in 2010, but it would be ‘U-shaped’. That is, the upturn would be slow, gradual or measured – there are various ways to express it, but a quick return to health wasn’t on the agenda.

But analysts are quickly revising that view. Some parts of the world – especially Asia – are experiencing ‘V-shaped’ recoveries. Of course that just leads the more gloomy economists to pronounce that the recoveries aren’t ‘V-shaped’, rather the start of ‘W-shaped’ recoveries. That is, the upturn will be short-lived; disappointment will follow in the form of another downturn.

There is no doubt that the US economy is at risk of a ‘W-shaped’ recovery. Europe and Japan are also at risk, especially as population growth is flat or negative in many countries and Chinese and Indian industrialization doesn’t confer the same benefits as for other parts of the world, such as Asia and Latin America.

In Australia, the shape of recovery is expected to be ‘U-shaped’ to begin with, turning more into a ‘J-shaped’ expansion as the full benefits of Chinese and Indian industrialisation become realised.

One issue that goes hand in hand with the shape of economic recovery is the timing and speed of the withdrawal of economic stimulus. If central banks act too quickly in lifting rates, ‘V-shaped’ recoveries can quickly turn into ‘W-shaped’ economic growth paths.

US sharemarkets have more consolidation work ahead. Over 2010 sharemarkets are likely to experience periodic surges followed by periods of consolidation – more like two steps forward, two steps sideways.

China

China has featured on the ‘What’s In’ lists for the past few years, and it no doubt will feature again next year in the 2011 list. The world has never before witnessed an economy with 1.3 billion people going down the path of industrialisation. And many find it hard to visualise until they go to China, experience the pace of change. And even then, they are only scratching the surface.

China’s demand for resources will no doubt amaze some commentators over the next few years, but the demand is entirely understandable when you consider the size of its population. The greatest limiting factor on China’s growth will be its access to resources. And there is the very real prospect that commodity supply will again fall well short of demand, driving prices higher.

Based on IMF projections, China will pass the US to be the biggest global economy in the next eight to 10 years.

There is the risk of a new commodity boom; resources companies, mining services and engineering face strong prospects; and the Aussie dollar could head towards parity with the greenback.

India

When it comes to industrialisation and broader economic development, India is probably a decade behind China.

India is effectively paying the price for restricting foreign investment in the 1990s and failing to invest in infrastructure. But each year, India’s population grows by around 16 million people. And not only is India’s population growing but its people are getting richer, buying more of the consumer durables that we take for granted in Western nations.

The solid pace of economic expansion in India further supports the view that mining, energy and resources-dependent companies – especially coal – will experience above trend growth in the short to medium term.