"In 2011/12 any recession is likely to come from extreme weakness in the US and European economies"
- Mark Crosby
After a severe financial collapse witnessed in 2008 the global economy is yet again experiencing slow growth. The media headlines are full of a new recession forecasts. In this relation, Dukascopy has interviewed an expert in Economics, Dr. Prof. Marc Crosby, Professor of Economics at S P Jain Center of Management in Singapore.
1) What is your forecast of the upcoming economic developments? In what way can the potential new recession be different from 2008?
The 2008 recession was initiated by the liquidity crisis that occurred after the Lehmann Bros collapse. The liquidity crunch affected global trade and exchange rates, and in one way or another every economy was affected. In 2011/12 any recession is likely to come from extreme weakness in the US and European economies as those regions seek to restore household and public balance sheets.
I am pessimistic particularly about Europe and the US because the resolution to the debt problems in Europe is difficult. We have seen a lot of austerity measures and lack of confidence around the austerity packages, but there is really no easy way out. As I see it, Asian countries and other countries without housing or public debt problems, such as some of the North and South American countries, are likely to continue to grow, and only slow down modestly in the face of recession in the US and Europe. It is difficult to forecast whether or not there will be a new recession, however there is certainly a possibility of it.
I would say that the weakest will be the US and Europe. Although there will be no real winners, many countries would be able to get through the recession, such as Asian countries, Singapore, Thailand, Malaysia, and Australia. The Asian region does not in general have the public sector debt problems facing other regions. I expect growth to moderate slightly, but in general for economies in this region to continue to enjoy steady growth going forward.
3) In 2008 in a time period from peak in June to September S&P (500) and S&P GSCI indices tumbled by 20% and 24% respectively. Following the Lehman Brothers' bankruptcy in September and the start of market sell-off, the indices plunged by nearly 70% till the end of the year. In 2011 in a time period from May till today S&P and S&P GSCI indices have already dropped by 13% and 26% respectively. Do you consider that the history will repeat?
Commodity prices in general are very procyclical and very volatile. They do go up fast with the economy, and come down with a crash in a recession. So it is likely that commodity prices would fall in the face of another global recession, but it is hard to know by how much – one hope is that the rising demand from India will support commodity demand from China, and keep commodity price falls to a minimum. Stock markets are also procyclical, but not as volatile as commodity prices. At the moment it seems that equity markets have had a good run, thinking that there is not a recession, so if a recession did eventuate I would expect to see equities slip back significantly.