Doubts raised on market rebound

27/05/2010 | Taimur Ahmad

Global markets surged for a second day yesterday following a bout of turmoil not seen since the dark days of the global financial crisis. But leading economists warned that the global recovery remained on thin ice

Global markets surged for a second day yesterday following a bout of turmoil not seen since the dark days of the global financial crisis, as fears of a eurozone meltdown appeared to recede.

But leading economists warned that the global recovery remained on thin ice – and that that would not change, even after factoring in resurgent demand from emerging economies.

Stocks rebounded sharply after a three-day decline, as China said it remains a committed investor in Europe, quelling fears that the region’s debt crisis would spread. But experts remained unconvinced the rally would be sustained given what they see as a bleak outlook for global growth.

Willem Buiter, chief economist at Citi, told Emerging Markets: “Whatever contribution to global growth the advanced industrial countries are providing now – and it’s already modest – will become even more modest.

“Even accelerating demand from emerging markets is not going to keep up growth globally.”

As Emerging Markets went to press the FTSE All-World equity index was up 2.6%, commodities prices had edged higher and high-yielding currencies were back in favour. Meanwhile the MSCI Emerging Markets Index advanced 2.3%, extending Wednesday’s 3.2% rally.

But Buiter cautioned on excessive investor enthusiasm for emerging market assets. “This exuberant growth in emerging markets, and the asset boom and bubble which is beginning to accompany it, will lead to a familiar boom, bubble and bust cycle,” he said.“The next global downturn will come from the emerging markets rather than the advanced countries.”

Arnab Das, head of strategy at Roubini Global Economics, told Emerging Markets: “The whole world, the global equilibrium has been destabilized by the crisis and the response to the crisis.”

He added that he was “concerned” by an apparent amnesia in financial markets in the wake of the crisis. “The bounce suggested to many that we got through the worst crisis in living memory, so, no big deal, let’s get back to business as usual.”

But he said: “We’re in a transition from an unsustainably high growth rate and level of activity” to “a more reasonable place”.

“Markets can’t just all go up because we’re pulling back from Armageddon. They have to differentiate,” he said. “I think we’re well into that process, and it’s going to have to continue for a few years now.”

Das said that emerging market growth and investment could suffer as surging capital inflows and upward pressure on currencies stoke inflation. “The flipside of very easy money continuing in the developed world is the export of inflation to emerging markets that are still pegging [their currencies] to the dollar.”

While he said that this dynamic would not necessarily imply a “macro crisis” for emerging markets, it would nevertheless mean “financial instability, which has to be tackled with tighter monetary policy slowing down the recovery in these countries.”

Experts in Abidjan warned this week that Africa remained vulnerable to European contagion through financial and trade channels, while others cautioned that the region is also dangerously exposed to an overheating Chinese economy.

Konrad Reuss, Standard & Poor’s managing director for sub-Saharan Africa, said that Africa could suffer if heightened risk aversion meant investors shunned emerging and frontier markets in favour of “safe haven” assets. He added: “As long as China will keep growing that will serve as a bit of a cushion.”

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