Coming to expect the unexpected

While the outlook for the global economy in 2009 is the worst in over 60 years, the policy response to the ‘great recession’ has been unprecedented.

The G20 meeting held in early April produced a result that was much stronger than general expectations and, if implemented, could help the global economy and financial system pull out of the current turmoil.

Policy initiatives have been very aggressive, but they have needed to be given the extent of dislocation in the financial system.

Having entered the global recession in pretty good shape, Australia will hopefully be one of the first countries out of the downturn.

In early April 2009, against the backdrop of the worst global recession in over 60 years, the leaders of the G20 met in London. Market expectations from the G20 meeting were relatively low, with concerns that agreeing on a specific set of policy measures would be beyond such a diverse group of nations dealing with the economic and financial crisis in their own way and in their own timeframe.

However, markets were pleasantly surprised by the outcome, with some concrete policy measures announced and a more detailed plan for the future. Since the low in early March, global equity markets have rallied strongly, with the Dow up around 23 per cent, the London market up around 19 per cent and the Australian market also up around 19 per cent.

So while the global economic environment is the worst in over 60 years, it is also clear the policy response has been unprecedented.

While it took authorities in some countries a little longer than others to understand the gravity of the economic outlook that was being driven by the global financial crisis, by the second half of 2008 it was evident that policy initiatives were coming quickly and with surprising resolve.

It certainly seems apparent that the authorities of the world’s major economies have heeded the lessons of history and are determined to provide the policy stimuli needed to ensure that this economic downturn, as severe as it is, does not persist for longer than absolutely necessary. Furthermore, when the global economy recovers, the architecture of the world’s financial system will have been redesigned in a way to help ensure that a repeat of this episode is not likely (or is at least dramatically reduced).

It seems premature to declare the worst of the global recession over, with general expectations there is likely more bad economic news ahead of us than behind. On April 23, 2009, the International Monetary Fund (IMF) released its latest global economic forecast and now expects the world economy to ‘grow’ by -1.3 per cent in 2009, the worst year since the end of World War II, with a modest 1.9 per cent growth recovery now expected in 2010.

Nevertheless, we must also remember that financial markets are forward looking and that a sustained recovery is likely to begin before signs of economic recovery are confirmed. Markets are clearly dealing with just such a scenario at present, but it is worth remembering that all bear markets can have a number of relatively solid rallies before a true bull market returns.

Stephen Halmarick is head of investment markets research and Belinda Allen is an analyst, Colonial First State.