by Xinhua writers Xie Peng, Liu Hong, Ding Yi
BEIJING, Sept. 15 (Xinhua) -- It has been a year now since the venerable investment-banking firm Lehman Brothers filed for bankruptcy protection, a collapse that rocked Wall Street and sparked a panic that reverberated around the world.
Twelve months later, optimistic speeches of better days ahead are being heard in everyone's ears and there is emerging evidence that a recovery from the worst recession since the Great Depression is almost at hand.
The current situation, however, seems to be only a rebound on a low basis. It is not known yet if the global economy can return to the ways of sustainable recovery, analysts say, noting that the global economy is exploring ways to recover while still in a fog.
FOG OF FINANCIAL DEFLATION
Still, the difficult situation of credit squeeze has improved much from the point of major capital and risk premiums after one year, analysts said.
For example, the three-month LIBOR (London interbank offered rate) has declined from 4.825 percent in October 2008 to 0.325 percent now, the lowest level in history.
Another core index, the LIBOR-OIS, also has fallen from a peak of 364 basis points to normal range.
According to the latest global Risk-appetite Index released by United Bank of Switzerland, after experiencing last year's "risk aversion," the index has returned to "risk seeking," close to pre-crisis levels.
Analysts attributed the improvement to low interest rates from major central banks and the large-scale implementation of quantative easing monetary policies, which helped the market pump in enough liquidity and credit.
Through the balance sheet of the Federal Reserve, one can see enormous sums of mortgage-backed securities and commercial paper, which means a lot of companies have obtained a large amount of capital by selling or mortgaging those kinds of risky capital.
The expansive capital market and security business also provided advantages for other modes of financing.
Nevertheless, the situation for the U.S. banking system is still not optimistic, analysts said, noting that behind the good news of economic predictions, there have been changes in accounting rules and the special disposal of bad debts.
Moreover, the issues of capital abundance and toxic capital have not been yet solved, a situation that imposes continuous pressure on banking systems and financial markets, analysts say.
Maury Harris, the chief economist at UBS, said the banking system would not block the recovery of the U.S. economy. Other economists said if the banking system could not return to normal, the multiplier effect of the entire monetary supply would still be restricted and a large amount of capital input by the central banks could not flow efficiently in the whole economic system.
FOG OF CONSUMPTION RESTART
The free fall stage of the recession appears to be over, as the decline of the U.S. and British economies has slowed and the economies of Japan, Germany and France have achieved increases since the second quarter of 2009, analysts said.
Olivier Blanchard, the International Monetary Fund's chief economist, said the recovery of global economy "has begun."
However, other analysts say the above-mentioned recovery has just been a rebound on a low basis, attributed to inventory rebuilding and large-scale fiscal spending.
Although consumer spending, the most important part of gross domestic product, unexpectedly increased in the first quarter, it fell back again in the second.
Analysts said if consumption can not be restarted, then the global economy would not return to a track of independent growth.
In the United States, actual disposable income declined in June and July. Moreover, Americans have started to save money and have banked nearly 5 percent of their income.
Another reason for pessimism was the gloomy labor market, economists noted. Data has shown that the U.S. unemployment rate reached 9.7 percent in August, the highest level in the past 26 years. Most economists predicted that the index would exceed 10 percent in the coming months.
Other economies around the world also are suffering unemployment problems. The Eurozone's unemployment rate in July reached 9.5 percent, its highest point in the past 10 years.
Dominique Straus-Kahn, the IMF managing director, said at a meeting of G20 finance ministers and central bank governors that the unemployment issue could trigger a new round of problems if the situation is not properly resolved.
FOG OF EXIT STRATEGY
Facing the unprecedented crisis, the international community and most of governments launched a series of vigorous stimulus packages, including both expansive monetary and fiscal policies.
According to IMF data, the total sum of aid capital promised by the Group of 20 countries has amounted to 12 trillion U.S. dollars as of June. Moreover, many major central banks jointly lowered their benchmark interest rates at the climax of the crisis.
Furthermore, governments also tried their best to enhance public input to stimulate the economy. It is estimated that the U.S. deficit this fiscal year will amount to 1.58 trillion dollars and Great Britain 106 billion dollars
Nevertheless, the central banks of major economies still thought they should keep loose monetary policies in case of a second recession.
Economists said a "strong prescription" was really necessary, but it also possibly led to "side-effects."
Inflation could be one of the fatal risks, economists said.
Economist Arthur Laffer warned that "while the short-term pain of a deepened recession is quite sharp, the long-term consequences of double-digit inflation are devastating."
Based on the above concerns and the earlier-than-expected recovery signs of most major economies, G20 finance ministers and central bankers who met in London earlier this month have made "exit strategy" a topic for discussion.
Some economies have already begun to change their priorities to prevent the risk of serious inflation. The Israeli central bank raised the country's interest rate in August. Australia, South Korea and India will do the same in the coming months to prevent their economies from becoming excessively hot, Riccardo Barbieri, Merrill Lynch economist said.
However, it remains unclear if the big bill for the stimulus package is "fiscally responsible for countries with huge budget and current account deficits," said Zhu Qiwen, a China Daily commentator.
Analysts say large amounts of deficits could possibly trigger a crowding-out effect in the short term, and cause a negative effect on capital formation and private consumption in the long term.
Kristin Lindow, senior vice president of Moody's Investors Service, called people to watch for the threat of a public finance crisis.
Therefore, the policy-deciders faced the problem that both "exit strategy" and "strong prescription" had their own abuses.
FOG OF ECONOMIC ROADMAP
Analysts are divided on whether the economy now faces a quick rebound in a V-shaped recovery, a more subdued U-shaped recovery, a W-shaped rebound or a L-shaped one, in which growth would return for a few quarters or become weaker once more.
Optimists said the current recovery was strong. The U.S. economy will possibly rise in a V-shaped recovery. However, Nouriel Roubini, a New York University professor who had accurately predicted the current crisis, said the American economy would rebound in a U-shaped recovery. He did not exclude the possibility of a second recession.
Kahn of the IMF said in an exclusive interview with Xinhua that the U.S. economy would recover first followed by other economies. But Justin Lin Yifu, World Bank chief economist and senior vice president, said the Chinese economy has already rebounded first and the emerging economies are becoming the locomotive that tows the global economic recovery.
Analysts said the emerging markets still have plenty of room to grow.
Jonathan Anderson, the UBS' chief economist for emerging markets, estimated that the average increase of the developed economies in the coming five years will only reach between 1.5 and 2 percent. But the growth for emerging economies will be between 5and 6 percent and Asia possibly with 7 percent, Anderson said.
