DIKI KAPITALISM: Extraordinary recession, ordinary recovery

By bne IntelliNews April 21, 2011

bne -

What is wrong with everyone and why all the long faces? If we hadn't just been through a crisis and if Western Europe weren't so concerned about another possible meltdown in Europe's periphery, then we'd be all popping bottles of bubbly and talking about a boom.

Goldman Sachs released a note in April entitled, "Extraordinary recession, ordinary recovery," which pointed out that after the mega-crash in 2008, the global economy is actually - and amazingly - growing quite nicely. Indeed, "the Eurozone recovery that started in mid-2009 has been close to the average of previous cycles since 1970," it said.

Despite the fact that GDP growth has been a little weaker than normal (as both private and public consumption have lagged), employment has grown slightly more quickly than normal. "Overall, economic activity has grown at a pace close to both the long-term trend and the average experience following severe financial crises," said the Vampire Squid's analysts.

Did you get that? Things are back to the normal long-term trend rates of growth. It is about time someone said: "Hats off to our respective central bankers." Against the odds, they have all but pulled off an amazing rescue and prevented the global economy from falling into an abyss of economic misery.

Indeed, in Russia things are more than good. True that key indicators like investment and retail sales are still growing more slowly than in 2008. But nominal incomes and retail sales have also already passed the 2008 levels. In other words, the Russian economy has recovered almost all the ground lost.

Russia has even got back almost all the money it lost: the 30% devaluation that the central bank pushed through at the start of 2009 has been appreciated away and the ruble is back to where it was before the crash. And thanks to higher-than-expected oil prices, the state has recovered more than half of the $260bn it spent on cushioning the economy from the worst of the meltdown's blow. Finally, the main RTS stock index went through the psychologically important 2000 mark in March and at the time of writing is about 400 points away from breaking its all-time high record (set in May 2008).

To be completely honest, this recovery is a bit artificial: the state was spending at a federal budget break-even level of $70 for a barrel of oil before the crisis (way too high) and is now spending at a level of $115 per barrel (clearly not sustainable). However, with oil currently around $120, this high level of spending is more than sustainable in the short term. Moreover, rather than spend down the rest of the Reserve Fund by the end of this year as planned (which saved Russia's bacon in the worst of the crisis), since March the government has been siphoning off excess revenue into the fund and started the process of building it up again. (The fund contained about $134bn going into the crisis and has about $26bn now.)

Problems abroad

There are still a lot of real problems to over come, but they are not emerging market problems. The World Bank highlighted the deepening divide between the old and new world with its World Economic Outlook report issued in April entitled: "Tensions from the Two-Speed Recovery," which sums it up nicely: while the West (and particularly the so-called PIIGs) worry about another meltdown, the worst problem the east has to worry about is overheating.

The combination of an extraordinary recession and an ordinary recovery has also left the West with large output gaps, which Goldman Sachs estimates to be at around 3-4% of GDP in most European countries. Fears of rising inflation, especially in food, are also a problem and causing interest rates to start rising before economic growth has fully recovered. That is a problems for everyone.

"Rising food and energy prices could push 5.3m more people into poverty across Emerging Europe and Central Asia," said Theodore Ahlers, director of strategy and operations for the World Bank's Europe and Central Asia region. "For most countries in the region, growth returned in 2010, following sharp declines in 2008 and 2009. However, the region's annual growth of around 4.5% was much lower than that of other regions in 2010, and projections for 2011-13 indicate only slightly stronger performance."

And of course it's the poorest countries that suffer the most from rising food prices, as food makes up a much larger share of a shopping basket's contents for the poor.

But given Russia is by far the richest of all the emerging market countries with a per-capita income on the order of $14,000 a year (on a purchasing power parity basis) - two or three times more than its fellow Bric members - it will be the least affected by rising food costs. Add to that the fact that Russia is also the world's fourth biggest grain producer only makes its position stronger. Food price hikes are actually a far bigger problem for places like China and India where hundreds of millions of people live on $1 per day or less. The comparative number for Russia is zero.

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