Length of recession is uncertain.....

No one knows how prolonged or deep this recession is going to be. The current downturn is unlike past recessions, and recovery, when it happens, may be weaker than in most past cycles. There are a few reasons for this.

First, all major regions of the world are experiencing economic decline at the same time, which makes this the first truly global recession in the post-war period. No economy is able to rely on exports to pull it out of recession.

Second, domestic spending in the US and other advanced economies, is also unlikely to recover for some time to come. Consumers in the US are over-stretched, having over-borrowed during the years of the housing bubble. The housing bubble has burst, and home prices are still falling. US consumers, who account for one-fifth of global consumption, will have to gradually reduce their debts and are therefore unlikely to move back to old ways of spending for some years to come. Consumers elsewhere, including those in China and Europe, are also facing declining values of their homes and assets. They are not expected to spend more and pick up the slack left by the Americans.

The third reason why there is great uncertainty over how long this recession will last is the continued fragility of the global financial system. Banks, especially in the US and Europe, have made heavy losses. Once the full extent of impaired assets becomes apparent, it is estimated that the loan losses will reach two trillion dollars in the US alone. These banks are therefore focused on building up their capital rather than making new loans. Furthermore, the de-leveraging that is taking place in financial markets as a whole still has some way to go. Although we are past the psychological panic that followed the collapse of Lehman Brothers in September 2008, there remains a high degree of risk aversion in the credit markets. As a result, even good quality corporate borrowers are having difficulty obtaining credit.

We therefore cannot say when this recession will end. The key factor is the US economy. Although China’s major government spending initiatives will boost domestic infrastructural demand, it is unlikely to provide a stimulus for the rest of the world. If we are fortunate and the US Government’s fiscal stimulus spurs new demand, we may come out of the recession in late 2009. However, many careful observers believe it is equally likely that the recession will last into 2010, and that the recovery when it comes, will be weak.

Inflation was higher than expected because of the spike in food and fuel prices globally. It has however been declining since the middle of last year and is expected to be close to zero in 2009. The key risks for this year therefore have to do with the scale of the recession and loss of jobs, rather than inflation. All recent indicators point to a continuing downward momentum in the economy. The decline in the advanced economies which has reduced demand for manufacturing exports. Services industries are also being impacted by the sharp contraction in global and regional finance, and in intra-Asian trade and tourism.

Governments had updated theirs economics forecasts for 2009, projecting GDP to contraction in this year. The position of low unemployment, the lowest in Asia last year. The resident unemployment rate was lowest in September. However, given the severe economic recession, we have to expect many more jobs to be at risk this year.