The shape of the recovery

• Despite increased optimism that a recovery is taking hold, we see a growing risk that the US recovery will look like a flash of lightning – a bolt out of the blue driven by short-term stimulus and restocking. Even in Asia, where the recovery is stronger, sustainability is still undermined by weak loan demand and poor infrastructure in many economies.

• At the IMF annual meeting taking place this week in Istanbul, we sense a possible tidal wave of controls and regulations. Such controls, especially those driven by a political agenda, may stifle banking and finance in the years to come.

• Another risk is the volcanic eruption brewing under the dollar. Fearful of a future crisis, many countries are keen to build currency reserves. Meanwhile, mindful of the fault lines beneath the dollar exposed by the crisis, they are also keen to diversify away from the dollar. But there are not many alternatives – a dilemma that creates instability in the currency world.

• Challenges abound, but fundamentals will still make a difference. In China, growth momentum is spreading, especially westward. In India, growth appears to be understated by misleading trade statistics. Even in Taiwan, growth prospects seem to be improving, despite damage from typhoon Morakot. Upside surprises are also expected in Saudi Arabia and the UAE after their first recessions in a decade.

Global

Gerard Lyons, Chief Economist and Group Head of Global Research
Standard Chartered Bank, United Kingdom
+44 20 7885 6988, Gererd.Lyons@sc.com

• At the annual IMF meeting in Istanbul,  three key risks stand out
• They are a short-lived US recovery, a new wave of banking and finance regulations, and destabilisation of the dollar
• These challenges are likely to shape the world economy in the years to come

IMF in Istanbul – risks ahead

From three films to three natural events
Last year at the IMF, I spoke about the global outlook in the context of three films. The first was ‘No Country for Old Men', as the catchphrase of that film – “You can't stop what's coming” – described the imminent global recession. The second was ‘Apollo 13', in which the head of mission control, Gene Krantz, is told, “This is NASA's worst moment”. He replies that if the three astronauts are brought back to earth safely, it will be NASA's best moment – and is proven right. Likewise, if the problems facing the financial sector were addressed properly and it emerged from the crisis in good shape, this would be an Apollo 13 moment for the financial industry. The third film was ‘Singing in the Rain', which aptly described the optimistic outlook for emerging markets at the time. But as I pointed out, while Gene Kelly did sing in the rain, he was completely soaked. And so it proved for emerging economies in the wake of last year's crisis. While the outlook for many emerging regions looks good, they are not immune to setbacks in the West.

This year – given the general consensus, the risk of further shocks, and the fact that many countries have already used their policy tools to the full – I used three analogies related to natural events, things beyond our control: a flash of lightning, a tidal wave, and a volcanic eruption.

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