Global Arab Network | Kuwait - Signs of recovery; end of recession appears to be in sight

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Kuwait - Signs of recovery; end of recession appears to be in sight

Global Arab Network - - Mohamed Tamer

Wednesday, 02 September 2009 15:50

Economic signs "are on the mend," and the end of the great recession "appears to be in sight," said the National Bank of Kuwait (NBK) in a report on Wednesday.

It added that the US Federal Reserve has gone from saying the economy is contracting more slowly, to saying growth is leveling off (i.e. forming a bottom), but noted that in that light the debate amongst investors and analysts has shifted again to the shape of the recovery.

The report added that the debate was now over whether the recovery curve was in the shape of a V or a W. "In other words, are we back (almost) to pre-crisis times? Or are growing pains in the cards as we witness some ups and downs in the months ahead?" It emphasized that V or W "have very different implications for investors and policy makers." Under V, inflation and tighter monetary policies are not very far ahead, the dollar is vulnerable, stocks and commodities are more attractive than under the alternative. Under W, the monetary authorities are on hold for a longer while, commodities and stocks have a flat or "flatter" profile, and the dollar could get some support from a deflationary scenario.

The NBK added, "We lean towards a W type scenario while acknowledging that the worst of the crisis is behind us. At this juncture where V and W look the same in the early stages, central bankers are being their usual cautious selves." International economic data has of course supported the notions of stabilization and improvement. To cite a few examples: July US employment lost "only" 247,000 jobs versus 741,000 jobs lost in January. US GDP fell 1.0 percent in 2Q09 versus -6.4 percent in Q1 of 2009.

In Europe, France and Germany eked out GDP gains in Q2 of 2009 following a string of losses. Japan grew 3.5 percent in Q2 of 2009.

"While welcome, these numbers also prompted some to wonder about their sustainability. In some cases, these numbers were helped by one-time measures such as cash-for-clunkers in the case of Europe, and huge government stimulus hitting during the quarter, in the case of Japan," the report said.

It added that the V/W debate also dovetails into the difficult and unresolved inflation/deflation debate, or the high/low inflation debate. Gold is still stuck near USD 950 per ounce while US 10-year Treasury inflation spreads have been trading between 1.5 percent and 2.0 percent (nominal Treasury yields over TIPS, suggesting inflationary expectations in that neighborhood).

It added, "Here the two camps disagree on the destination of the massive new liquidity created after the crisis. Where will it go? Into spending and higher prices say the 'inflationists.' Nowhere fast say the deflationists, thanks to very weak lending (and falling money velocity)." As for the GCC economies, the report said that they are in line with the rest of the world and their stake in the V/W debate is how it reflects on oil prices currently hovering near USD 70 per barrel.

GCC stock markets are also near highs for the year, in part on global optimism. They also continue to be helped by their strong (and now recovering) asset holdings (SWFs and others) and seem to have digested, for now, recent financial bumps.

"Lower inflation is apparent in recent GCC data, driven by easing rents especially in the UAE and Qatar. However outright deflation will be more difficult to sustain elsewhere in the GCC, in part given limited competition in the retail sector," the report concluded.

Global Arab Network

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