October 2009 

 October 2009 


  • World: The IMF revises up their growth expectations
  • Trade: Baltic Dry Index going against the grain?
  • Asia-Pacific: Natural disasters strike
  • US: The housing market bottoms, what next?
  • Indonesia/Philippines: Spread convergence

Dougal Crawford, Senior Economist

 The views expressed in World Risk Developments are EFIC's. They do not represent the views of the Australian Government.

World: The IMF revises up their growth expectations

In October, the IMF revised up its forecast for global GDP in 2009 and 2010. According to the IMF, the world economy has stabilised and will be begin to recover in H2 2009.  The recovery is expected to be led by China, India and other emerging Asian economies.  Growth in the industrialised economies will be significantly weaker and below trend.

In annual terms, the IMF predicts global GDP to contract by 2.3% (at market exchange rates) in 2009, before rising by 2.3% in 2010.  This compares to their July forecast of a 2.6% fall in 2009 and 1.7% increase in 2010

The IMF attributes the recovery to aggressive public policy in both advanced and developing countries, which supported output, limited the collapse in the global financial system and boosted confidence. 

However, unlike some commentators, the IMF does not predict a sharp V-shaped recovery.  Rather growth will be constrained by the private sectors (financials, corporate and households) in the major industrialised economies repairing their balance sheets.  High unemployment will also weigh on the recovery. 

At the regional level, non-Japan Asia is expected to lead the recovery (see chart, red bars).  Fuelled by policy stimulus and a rebounding manufacturing cycle, non-Japan Asia is forecast to grow by 4.7% in 2009 and 6.7% in 2010.  Chinese GDP is expected to increase by 8.5% in 2009 and 9% in 2010, which is near pre-crisis rates.

WRD October 2009 Chart 1

For advanced economies, growth of around 1.1% is forecast in 2010, which is well below trend of 2¾% (see chart, blue bars).  In 2010, Canada (2.1%), Japan (1.7%) and the US (1.5%) are expected to post the strongest growth.  Activity in the Euro area (0.3%) and the UK (0.9%) will lag.  Further out, growth is expected to remain slightly below trend, consistent with past financial crises. 

The recovery in emerging Europe (including Russia) is also likely to be slow, especially for countries hit by financial sector turmoil and the decline in international capital flows; notably the Baltics, Hungary, Bulgaria, Russia and Ukraine.  Ukraine is forecast to contract by a whopping 14% in 2009. 

Trade: Baltic Dry Index going against the grain?

While recent data suggests global activity is rebounding, the Baltic Dry index – a measure of shipping costs for raw commodities – has been sinking.   

The Baltic Dry Index (BDI) is a composite index of leasing rates for three types of ships used to transport raw materials – such as iron ore, coal and grain.  In theory, it is correlated with demand for raw materials and hence world GDP. 

In H2 2008, the BDI plunged to its lower limit – the daily operating cost of vessels (see chart).  Rates recovered in H1 2009, but have fallen again more recently.   This could indicate a drop in demand for commodities, notably from China.

WRD October 2009 Chart 2

Then again, it may partly reflect rising capacity, as ships ordered in the boom times – 2-3 years ago – roll off the docks. About 130 Capesize vessels (the largest) are due to be delivered by end-2009, equivalent to 14% of the existing fleet.  Price weakness has been concentrated among Capesize vessels.

Asia-Pacific: Natural disasters strike

On September 26, tropical storm Ketsana caused massive flooding in Manila and surrounding areas. On September 29, a tsunami devastated coastal regions in Samoa, American Samoa and to a lesser extent Tonga. The next day, two earthquakes struck near the city of Padang, the provincial capital of West Sumatra, Indonesia. Over 1000 people have been reportedly killed. 

Apart from the catastrophic loss of life, the disasters may have a negative impact on the Philippine and Samoan economies in the short-term.  Like most disasters, the reconstruction effort will support GDP over the longer-term. 

  • Manila accounts for almost half of Philippine GDP.  In particular, consumption – which accounts for two-thirds of GDP – will be dented over coming months.  According to reports, the agricultural sector has incurred minimal damage. 
  • In Samoa, the tsunami destroyed coastal villages on the south side of the island of Upolu.  This will hurt tourism – which accounts for 17% of GDP – as this is the main tourist area.  Unfortunately, the economy is already reeling from job losses at the Islands largest employer (Yazaki) and the closure of a major tuna cannery in American Samoa.  In September, the Asian Development Bank forecast that the economy would contract by 0.8% in 2009.
  • Early indications are that the economic impact from the quakes in Sumatra will be minimal.  None of the island’s major mining or industrial facilities were damaged. 

US: The housing market bottoms, what next?

There are signs that the US housing market – the sector which precipitated the global financial crisis – has bottomed.  However, this positive development should be kept in perspective.  Housing activity remains at extremely low levels and any recovery will be constrained by high unemployment, households focusing on rebuilding savings and a large stock of unsold exiting homes. 

A number of indicators suggest that the US housing market has bottomed.  New housing starts have risen in recent months (see chart, left panel).  The overhang of the stock of unsold new houses is also unwinding relatively quickly.  In terms of months’ supply housing inventory has dropped from just over 12 months in January to 7.3 months in August (see chart, right panel). Importantly, house prices also appear to be stabilising after large falls.

WRD October 2009 Chart 3

However, these ‘green shoots’ should be kept in perspective. Construction activity remains at a very low level.  Housing starts are just above the lowest level in the post-war period and are only 40% of the 20-year average of around 1.5 million starts a year.  Homebuilder confidence is also still well below levels that indicate ‘good conditions’. 

Any recovery also faces a number of headwinds.

  • Unemployment is at 9½% and is expected to remain high throughout 2010-11.  Consequently, households will be hesitant about taking on large financial commitments.
  • Households are focusing on rebuilding their balance sheets.  Even following the recent rally in the equity market, households have seen significant wealth destruction.  Household net worth is down by 17% from its peak, by far the largest fall in the post war period.  The fall in house prices have left, according to IMF, up to 20% of mortgagees with negative equity. 
  • Large stock of unsold existing homes. While the inventory of new homes is returning to more normal levels, there remains a large stock of unsold existing homes limiting the need for new housing.  This includes a large number of homes going through foreclosure.  At the end of June, the percentage of home loans that were in foreclosure or at least one payment past due was around 13% – the highest level since the the Great Depression.
  • A ‘swing factor’ is the share of mobile home ownership. Through the boom – in part reflecting easy access to credit – the share of mobile homes in new housing units tumbled from 15% to 5%. If this share returns to pre-2000 levels this will be a significant drag on the demand for new housing.

Indonesia/Philippines: Spread convergence

The differential spread of Indonesian over Philippine benchmark bonds has vanished over recent months (see chart).  The convergence has more to do with improving Indonesian performance than poor Philippine performance.

WRD October 2009 Chart 4

Indonesia’s economy has been resilient to the global recession.  The IMF expects the economy to grow by 4% in 2009 and 5% in 2010.  If realised this would be one of the best performances of any major economy and notably stronger than forecast growth in the Philippines of 1% in 2009 and 3% in 2010. 

Another factor driving the convergence is that the political situation in Indonesia has become clearer, after the recent re-election of Susilo Bambang Yudhoyono (SBY).  There is hope that SBY, helped by his new Vice President Boediono and Finance Minister Sri Mulyani Indrawati, two noted economic reformers, will accelerate pro-business reforms.

In contrast, political uncertainty is rising in the Philippines, as the May 2010 presidential elections approach.  At this stage there are about half a dozen candidates. 

In September, Moody's upgraded Indonesia to Ba2 while leaving the Philippines Ba3.  Fitch and Standard and Poor’s have the two countries level.