Global Economy Showing Signs of Life

by Inya Ivkovic, MA

The Organization for Economic Cooperation and Development (OECD) said this week that the outlook for developed economies is brightening up for the first time in two years on signs that the clutches of the global recession are finally easing their grip. According to the OECD, the combined economies of its 30 members are expected to stop contracting and to expand 0.7% next year. True, this is hardly a number to get overly excited about. Still, it is a step in the right direction, albeit a tiny one.

As many economists predicted before, the turnaround is going to be felt the most in the U.S., which shouldn’t be too much of a surprise, considering the U.S. had the most money to dump into its financial system. Additionally, the Euro region is also showing signs of a turnaround, although at a much slower pace; however, this region hasn’t contracted either as deeply or as dramatically as the U.S. Interestingly, according to OECD, Japan’s economy managed to detach itself from the impact of the global recession for the most part. But the fear now is that Japan’s slow economic contraction is still unraveling, which could mean tougher times are still ahead of it.

In concrete terms, the OECD expects the U.S. to lead the recovery by expanding 0.9% in 2010, whereas earlier forecasts called for no growth at all. Canada’s output is also expected to grow next year by 0.7%, whereas an earlier forecast called for a growth rate of 0.3%. By the OECD’s account, currently, most member economies will have hit or are very near hitting the bottom, and even if the recovery is slow, it is still a recovery and still a major achievement of concerted and global coordinated economic policy.

Most of the OECD’s predictions are based on world trade finally developing a pulse, as emerging markets, such as China, India and Brazil, have already shaken off the effects and are running ahead of the global financial crisis. Furthermore, businesses all over the globe are more confident that the market is going to be receptive to their products and services. Inventories have been adjusted to accommodate the demand and the time is ripe for increasing the production.

Of course, this is no ringing endorsement that the road ahead is going to be absolutely rosy. By historical standards, the rebound the OECD is basing its prediction on is very weak and still very vulnerable. To illustrate, the collective output of OECD members for 2008 is still expected to shrink 4.1%, which represents only a marginal improvement over the March estimate calling for a contraction of 4.3%.

There are several areas that could put a serious damper on recovery, such as rapidly increasing bond yields, for example. After the loudest public outcry in decades for the government bailout money to be injected as fast as possible into financial systems, investors have finally regained consciousness and are getting increasingly nervous about what will this huge influx of money do to inflation. At the moment, hyperinflation sounds like a very distinct possibility if the global economy is truly about to rebound.