• Ice is melting in the West, with fears of a financial meltdown dissipated

• Markets are expecting economies to bottom in H2-2009

• Of the three deflationary forces at work, the collapse of world trade and the severe inventory correction have passed their worst, but deleveraging will take a long time to unwind

• Recovery in the West is therefore likely to take a long time, with a prolonged period of low interest rates

• In the East, some genuine green shoots are emerging, especially in East Asia, where economic fundamentals are good

• China's rebound is having an important positive impact on confidence outside the country and on commodity prices

• Once India's election is out of the way, confidence and growth should strengthen

• Except for emerging Europe, other developing economies should also have passed their worst

• Plus focuses on Asia, Africa, Middle East, FX, and Commodities, and highlights on Asia, BIS, Brazil, Hong Kong, and Indonesia

Synopsis

Melting ice, missing fire

Overview: More a case of the ice melting than green shoots reappearing
There has been much talk of green shoots recently. In the West, it may be better to think of recent developments as the snow and ice melting, whereas in parts of Asia, there may be more genuine signs of green shoots. The positive is that the financial sector has been pulled back from the brink, with a meltdown averted. We are also now seeing genuine signs that economies are close to hitting bottom, in the sense that they may not have much further to shrink. All of this is consistent with the view we have held for some time: that the recession in Asia would be shorter and shallower, whilst the US and UK economies would hit bottom this autumn, with the trough in Western Europe coming slightly later.

Asia: Too much optimism, too soon
H1-2009 should mark the worst of Asia's economic contraction, but expectations of a rapid recovery for the region are overdone. We expect economies with large domestic markets and less exposure to exports, such as China, India, and Indonesia, to recover sooner. Hong Kong and Taiwan will benefit from their close ties with China, but others will see a subdued recovery in 2010.

Africa: Financing the future
Previous global economic downturns have impacted Africa with a lag. While green shoots of recovery are being seen elsewhere, African economies have been hit through a number of different channels. A commodity price recovery is necessary, but not sufficient, to restore rapid growth. Financial-sector reform is a prerequisite for finding homegrown solutions to the crisis.

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