Q2 2009: Is the world on its way to recovery?

Author: Countries and Consumers

Date published: 27 Aug 2009

In Q2 2009, some advanced and emerging economies saw astonishing results in real GDP growth. Whilst emerging economies are showing a faster than expected recovery, advanced economies are trailing their way back from the red. Europe's two largest economies, France and Germany, returned to growth along with Japan. Nevertheless, this recovery is vulnerable as uncertainties on the global front have not faded.

The advanced world: government spending paving the way

The French and German real economies bounced back unexpectedly in Q2 2009, posting growth of 0.3% respectively over the previous quarter compared to the contraction of 1.3% and 3.5% respectively recorded in Q1 2009. Not only did stimulus packages finally start impacting household spending, but industrial production and exports also showed signs of recovery. Exports of both countries increased by 2.9% and 1.7% respectively compared to Q1 2009, the first quarter-on-quarter (q-o-q) rise after a year. Nevertheless, analysts are still wary that the effect of increased government spending might be short-lived;

Japan's economy rebounded after five consecutive quarters of decline in Q2 2009, growing by 0.9% over the previous quarter. In Q1 2009, real GDP shrunk by 3.1% over the previous quarter. In Q2 2009, exports grew by 10.5% over the previous quarter as Japanese manufactures benefited from recovering demand in China and other emerging markets. Private consumption also inched up on a quarterly basis in Q2 2009 for the first time in over three quarters owing to government incentives such as cash handouts and other incentives to boost the purchase of ecological products. However, uncertainty prevails over the strength of this recovery amid concerns about the pace of recovery in the USA and the effect of the stimulus packages wearing off;

Singapore posted positive growth of 4.8% q-o-q in the second quarter of 2009 compared to a 3.2% decrease in the previous quarter. This was the first rise after contracting four quarters in a row. This was largely on account of expansion in the manufacturing sector (10.2% on a quarterly basis) caused by the spike in output in the biomedical manufacturing sector. Financial services also saw an impressive rise of 5.3% over Q1 2009 owing to renewed interest in the stock market. Nevertheless, recovery is likely to be muted until mid-2010 unless consumer demand in the USA starts to grow;

Aggregate eurozone real GDP for Q2 2009 was also uplifted reflecting a decrease of 0.1% q-o-q, an improvement from the 2.5% q-o-q decline witnessed in the previous quarter. However, countries such as Italy (-0.5% q-o-q), Spain (-1.0% q-o-q) and Austria (-0.4% q-o-q) remain in recession.

Real GDP growth of selected economies: Q1 2009 – Q2 2009

Growth over previous period (%)

Source: National statistics and Euromonitor International from International Monetary Fund (IMF)

Note: (1) Data is seasonally adjusted except for Indonesia. (2) Data for FY 2009 are projections.

The emerging world: is the quick recovery sustainable?

China's export-driven economy slowed sharply in late 2008 but economic indicators suggest that the economy is taking off. With the economy growing by 7.9% year-on-year in Q2 2009 compared to 6.1% growth in the previous quarter, month-on-month exports showed growth of 7.5% and 10.5% respectively in June and July 2009. The manufacturing sector, measured by the Purchaser Manager's Index, expanded for five consecutive months in July 2009 and electricity output, which has been falling since November 2008, is also growing again;

Indonesia's real economy grew by 2.3% q-o-q in Q2 2009 on top of the 1.6% rise in Q1 2009, better than expectations. Expansion in domestic demand coupled with growth in exports contributed towards this recovery. The country's lower dependence on foreign trade compared to its neighbours has proved to be advantageous. Additionally, since only around 10.0% of spending planned for 2009 has been utilised so far, H2 2009 is expected to see better results;

On the other hand, some emerging markets like Russia and Mexico are sinking deeper into a recession. Preliminary estimates suggest that the economies shrunk by 10.9% and 10.4% year-on-year (y-o-y) in Q2 2009 compared to the decline of 9.8% and 8.2% respectively in the previous quarter. The slump in world demand has hit both countries severely, resulting in widening trade and budget deficits.

Exports of selected economies Q1 2009 – Q2 2009

Growth over previous period (%)

Source: National statistics and Euromonitor International from UN trade statistics

Note: Data is seasonally adjusted except for Indonesia and Japan.

It seems like many countries are on their way to recovery; however, they remain vulnerable, mainly due to the fragile state of the export sector. In addition, Q3 2009 results will indicate whether this growth is sustainable in the advent of tightening government fiscal stimulus or lower base effects seeping in. Recovery in H2 2009 is likely to be sluggish and will continue only with an increase in global aggregate demand.