Cautious Optimism: The Predictions For 2010

I recently interviewed the economist and media commentator Mitul Kotecha who wrote guest articles for my own blog at the end of Qtr 1 and Qtr 2 this year. I was confused with the conflicting predictions in the press and wanted to get an expert opinion about the prospects for the economy and employment market in 2010.

Mitul is a regular guest on TV news channels CNBC, Reuters TV and Bloomberg TV to discuss his views on the global economy and is frequently quoted in publications such as the Wall Street Journal and The Financial Times.

As you’ll see from the transcript of the interview below, he’s cautiously optimistic about the prospects for 2010 - despite the recent concerns about Dubai’s debt problems and the possibility of  a ‘double-dip’ recession.

“Cautious Optimism For 2010“

Sital: Mitul, in your guest article at the end of Qtr 1 in April, you correctly predicted ‘the light at the end of the tunnel’ and indeed we’ve seen a 6-month stock market recovery along with the US and some European economies coming out of recession.

As we approach the end of 2009, what’s your view on the global economy?

Mitul: Sital, looking back to Qtr 1 the market mood and expectations for economic growth were particularly negative, but fortunately at the time governments and central banks were particularly aggressive in terms of providing economic and financial stimulus.

This worked to an extent as the worst fears proved unfounded and economic growth turned around. As you note, the US and European economies have moved out of recession but there are still many question marks about the pace of growth in the months ahead.

It seems to me that excessive pessimism has given way to undue optimism and this has been reflected in the huge gain in equity markets this year. In market talk, a lot is in the price now and markets have largely discounted recovery.

Nonetheless, considering we were all facing the abyss only a few months back the outlook for next year is much healthier.

Sital: So looking back, who would you say were the ‘winners’ & ‘losers’ during 2009 - both in terms of economies and market sectors?

Mitul: The winners in 2009 were emerging market economies and stock markets. I have lived and worked in Hong Kong for the last 16 months and it is evident that in Asia the economic recovery has been far quicker and stronger than in the developed economies.

This has been reflected by the strength of capital inflows into emerging market assets and the relatively strong performance of stocks in the region. The strong performance was driven by the massive improvement in risk appetite during the past year as economic and market fears gave way to an improvement in market confidence and jump in attraction for riskier assets.

This helped various asset classes including stocks, commodities and corporate bonds but was negative for the US dollar which came under pressure over much of the year. In terms of market sectors, technology, consumer services and basic materials proved the most resilient in terms of equity performance and this was also where jobs were most resilient to the downturn.

Sital: So where do you think we are with economic recovery?

Mitul: Well, what is clear is that we have passed the worst.  What is less clear is the strength and magnitude of recovery in the months ahead.  Recovery has been driven by massive fiscal and monetary stimulus over recent months but there is still a significant risk that once this stimulus is scaled back economic growth may slip again.

Sital: And how do you see the recovery unfolding as we get into 2010?

Mitul: Overall, I think recovery will continue but it will be gradual, especially in the so-called G4 economies of the US, Europe, Japan and the UK. Emerging markets will likely lead recovery once again, with countries such as China and India likely to stand at the forefront of recovery.

Australia and New Zealand will benefit from their proximity to Asia and see a relatively quicker pace of recovery than other developed economies.

Nonetheless, without rapid growth in the G4 economies the global economy will only see a slow pace of recovery.

Sital: So what do you make of the current situation in Dubai? Over the last week, we’ve seen some big stock market falls over concerns regarding the exposure of western banks to Dubai’s debt and the impact this could have the world economy.

I know it may be too early to call, but how is this likely to impact on everything you’ve said about the recovery?

Mitul: The problems in Dubai came as a bolt out of the blue given that the general perception was that Dubai was on the path to recovery.  I was there only a few weeks ago visiting clients and the message from within Dubai was one of cautious recovery.

I believe that the problems will be contained and that it will be seen as a regional issue rather than a global one.  Nonetheless, it does add to the worries about banking sector health in general.  In particular, UK bank exposure is relatively high, suggesting more vulnerability of UK markets compared to elsewhere.

I don’t think Dubai’s problems will have a major impact on global recovery, but it does provide a strong reason not to be complacent. There is still a long road to recovery and as reflected in the events over the past few days there are still many stumbling blocks along the way.

Sital: Let’s talk about the labour market. Most economies have unemployment still rising in view of the lag between GDP and employment levels - when do you expect unemployment levels to peak and us finally see unemployment start to follow a downward trend?

Mitul: There are already some positive signs in labour markets globally.  In the US however, the unemployment rate is above 10% but the pace of layoffs is slowing.  This is echoed in other countries but it is likely to still be a few months before unemployment rates peak around the middle of 2010.

The pace of layoffs will continue to ease well before this. Moreover, there are already signs of increased activity in the jobs market and anecdotally there are growing signs of improvement in the jobs market in many countries.  In the finance industry the impact of the crisis was particularly severe but the turnaround in the health of many banks has resulted in a resumption of hiring.

As you note, the unemployment rate itself is a lagging indicator and tells us little about growth in the months ahead, but 2010 is already looking better on the jobs front.

Sital: And how long before we see the economy and labour market return to say the levels of 2006?

Mitul: Although the jobs picture is expected to turn around more significantly next year, the gradual pace of economic growth expected over the next couple of years suggests that it will be a long time, years rather than months, before the employment picture returns to the levels at which it was in 2006.

For instance, the average unemployment rate in the US was 4.6% over 2006, 8.3% in Europe and 5.4% in the UK compared to 10.2%, 9.7% and 7.8%, respectively at present.

Sital: And what about wage inflation? On the ground, I’ve seen salary levels fall significantly in areas; 20-30 percent falls not being uncommon as the market readjusts.

Mitul: There has been a sharp downward adjustment in wages offered for new positions over the past few months and the 20-30% on the ground drop is a fair representation.  Partly this reflects the fact that compensation packages had reached untenable levels and some of the adjustment has brought things back to more realistic levels.

Wages offered are still adjusting lower but the pace of adjustment is not as severe as it was.  The adjustment in compensation packages is mirrored in earnings for people in work but it is worth noting that whilst earnings growth has slowed it has not turned negative.

Sital: What should we expect to see with regards to salary packages and wage inflation during 2010?

Mitul: Cutting wages was crucial for companies to return to profitability this year and wage inflation is only likely to pick up slowly given the excess slack in the jobs market.  Higher unemployment at least until the middle of next year suggests that the labour market will remain loose for some months to come.

Nonetheless, in some areas where there is stronger expansion, wage growth and compensation packages have increased substantially.

Sital: And looking towards 2010, who are likely to be the winners and losers?

Mitul: I continue to believe that in terms of regions, emerging markets will continue to out-perform given the stronger economic performance expected.  G4 economies will recover more slowly and my fear is that markets have been pricing in a stronger recovery than is likely.

I think recovery will become more entrenched, but I find it hard to believe that we will see a “normal” recovery.  2010 will likely be a year of steady economic improvement but one that will still be very fragile.  

The most developed economies including the US and Europe will face many constraints from banks restricting credit and loan availability to consumers wary of spending due to still-high unemployment.

Sital: Have you any final thoughts or advice for readers for 2010?

Mitul: Although I may sound cautious on recovery prospects I do believe that we are on the road to recovery.  The crisis is over and there will be plenty of opportunities over the coming year both for investment and in terms of jobs.

The good news is that over-cautiousness over the past year resulted in a rapid increase in unemployment but now many employers are finding that they were either too quick or too aggressive in cutting jobs and will need to reverse policy in 2010.

Sital: Mitul, thanks for your time and thank you for sharing your insights. Best wishes for the festive season and we look forward to your insights next year.

In the meantime, if our readers want to learn more about your views on the economy and financial markets, where should they go?

Mitul: It was a pleasure speaking to you and your readers.

For further articles and opinions you can visit my blog, The Econometer, where I post my thoughts and comments every few days on the global economy and financial markets. And for those on Twitter, you can follow me at www.Twitter.com/MitulKotecha.

Very best wishes to you all for the holiday season and for 2010.

—————————————–

Based in Hong Kong, Mitul Kotecha is Managing Director and Global Head of FX Strategy for a large European Investment Bank. You can follow Mitul’s views on the economy and financial markets at he’s personal blog, ‘The Econometer‘

By Sital Ruparelia

Comments

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Well, cautious optimism is better than no optimism at all!

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