By Economist Kevin Lings

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International

The global recovery has gained traction and financial markets worldwide have posted impressive recoveries. Some countries returned to positive real GDP growth in the second quarter of 2009, but the majority did so in Q3 2009 (charts 1, 2, and 3), including South Africa. Although many economies remain fragile, forward looking economic indicators point to a further improvement in economic conditions during 2010 chart 4).

The key factor leading to the recovery has been the massive stimulus provided by expansionary economic policies (both monetary and fiscal, chart 5), and the fading drag from the financial credit crisis.

The US housing market, which was at the heart of the global credit crisis in 2008/2009, has also improved; after a dramatic and protracted collapse in 2008. In particular, new and existing home sales have risen noticeably (chart 6), while the average house price in the US has increased for six consecutive months (chart 7). The rise in home sales over the past year has meant that the massive inventory overhang in residential property is starting to ease. Inventories of existing homes are now down at 6.2 months of sales, compared with a peak of 10.6 months of sales in November 2008 (chart 8). The long-term average is 6.2 months of sales.

The improvement in the housing market appears to have been driven by two main factors. The first is the affordability of housing. In terms of the US housing affordability index, in May 2009 US housing was the most affordable ever recorded, mainly as a result of a 30% decline in house prices (chart 9 and 10). The second factor is the tax incentives provided by government. As part of the US Government?s plan to stimulate the US housing market and address the economic challenges facing the country, the US Congress passed legislation, almost a year-ago, that provided various tax incentives to purchase a home. These incentives were initially scheduled to expire at the end of November 2009. However, on 5 November 2009 they were extended until 30 April 2010.

This does not mean that the housing market is overwhelmingly on the road to recovery. Homes sold as foreclosures remain extremely high, and there are numerous houses still at risk of default / foreclosure. Nevertheless, the housing market does appear to have stabilised, with clear indications that an improvement is underway, albeit off a very low base.

The large emerging economies (BRIC countries) continue to attract a great deal of attention, with Brazil and China currently at the core of that focus. Economic activity in China is actually accelerating, especially domestic expenditure. China?s GDP grew by 8.9% year-on-year in the third quarter of 2009 and is up an impressive 7.7% year-to-date (chart 11). All of this activity is domestically driven, with exports declining by an average of 20% year-on-year in the three months from July 2009 to September 2009 (chart 12). Despite the fall-off in exports (which has more recently improved a little), China is well on track to achieve at least 9% GDP growth for 2010 as a whole (chart 13).

Brazil has rebounded impressively, after experiencing a sharp decline of 11.2%q/q (saar ? seasonally adjusted annual rate) in the final quarter of 2008 and a decline of 3.5%q/q (saar) in the first quarter of 2009 (chart 14). The economy?s quick turnaround was driven mainly by substantial policy stimulus and the recovery of exports, despite the currency having strengthened by over 30% against the US Dollar in 2009. The chief driver of exports has been increased demand for commodities from China. Although the run-up to next year?s presidential election could hamper necessary changes to the current economic policy stimulus, the current growth rate of around 5% is set to continue in 2010.

At the start of 2010, the main global economic uncertainty is the timing and impact of a withdrawal of the unprecedented financial support, monetary accommodation and fiscal stimulus measures adopted by the US, UK, Europe and other countries to deal with the crisis (chart 15 and 16). This uncertainty includes:

• a potential slump in economic activity in late 2010 and early 2011 should the withdrawal of the extreme financial support measures stall the recovery
• the risk that as the current liquidity levels are reduced, asset prices are viewed as over-valued
>li>the re-pricing of risk, especially corporate bonds, as the market assess the withdrawal of direct government support
• worries about high government debt and large budget deficits in mature market countries; for example Greece.

It is therefore vital that the stimulus is withdrawn gradually and in conjunction with further evidence of the sustainability of the recovery; especially an improvement in labour market conditions (chart 17).

STANLIB?s view is that while there is evidence of a reasonable economic recovery that should unfold more fully over the next 12 months, there are a number of factors that suggest that world growth (especially in the developed world) could lack acceleration into 2011 (chart 18). These include continued conservatism by banks and households, a withdrawal of the extreme fiscal and monetary policy stimulus, increased cost of financial regulation, persistently high levels of unemployment and low levels of fixed investment, given the current excess capacity.