U.S Taxpayers Earn $14 Billion Profit on Fed Bank Bail-out Loans

Ka-ching!!  According to reports in both the Financial Times of London, as well as the New York Times, the Federal Reserve has made a $14Bn profit on loan programs that have provided hundreds of billions of dollars in liquidity to the financial system since the start of the crisis two years ago, according to Fed officials. The internal estimate is based on the difference between the fees and interest on the lending facilities and the interest the Fed would have earned had it invested the funds in three-month Treasury bills. The central bank earned about $19bn in income from charging interest and fees to financial institutions and investors that tapped the new facilities to obtain much-needed funds during the turmoil. The interest the Fed would have earned by investing the same amount in T-bills was an estimated $5bn, leaving a $14bn gain since August 2007 for a handsome. The Fed assessment underlines the possibility that other central banks could make a profit on their crisis-fighting measures – at least before adjusting for the risk they assumed.

“The taxpayers want their money back and they want the government out of our banking system,”

Who's paying back..??

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times. These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies. The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages. But the mere hint of bailout profits for the nearly year-old Troubled Asset Relief Program has been received as a welcome surprise. It has also spurred hopes that the government could soon get out of the banking business.

Credit Default Swap offering and structure

Profit of Doom

plan or your personal stock portfolio has tanked over the last two years or so, knows that it’s because of the global financial crisis. It was triggered by the collapse of the housing market in the United States and magnified worldwide by the sale of complicated investments – some, myself included, would say risky bets of the type found in casinos and betting parlors – that Warren Buffett warned about in March 2003, and once labeled these derivative products as ‘financial weapons of mass destruction.’

These instruments which used to be solely the province of “Bucket Shops” and for most of the 20^th century were illegal investment instruments are called credit derivatives or Credit Default Swaps (CDS). They were made legal in the 106^th Congress (2000-2001) by the financial industry lobby and complicit congressmen like former Texas Senator Phil Gramm and House Majority Leader Dick Armey (also from Texas) under their political party’s anti-government orthodoxy of “de-regulation.”  Today these instruments compose a $450 Trillion market – a veritable ticking financial WMD that can potentially wreck the entire global financial marketplace.

The reason I’m bringing all this up is because I saw an interesting segment this evening by 60 Minutes’ Steve Kroft, in which he walks viewers through the fundamentals of these financial WMDs called Credit Default Swaps (CDS) which were the derivative products underlying the near collapse of the global financial markets.  Ironically, these instruments are once again being structured and sold to investors as if . . . oh, what’s the point..??  Just check out the video.

Web Resources:

How to Understand the Derivatives Market

Congress Aims to Reform Derivative Markets

ECB Calls for More Transparency in Derivatives Market  

Why Africa matters to American mational interests

Every so often the Rev. Jesse Jackson makes a few notable and insightful comments. His most recent HuffPo article about ‘Why Africa Matters’ is one of those moments. I have postulated in the past that as the demographics of the nation evolves, so too will our foreign policy and international relations voice, values, interests, priorities and objectives change. We’ve seen that most recently in how this president chooses to engage the world.  Some call it “smart power” or “public diplomacy” as a paradigm shift.  Other’s most recently have framed these changes in terms of ‘The End of Macho‘ or a decline in the underlying paradigms of the Anglo-American or Eurocentric male dominance ethos in framing foreign policy issues and international relations.  The sharp contrast, for instance, between George Bush – a semi-literate, go-it-alone, blue-blood, poker playing, red-meat eating, “macho” Texan; and Barack Obama – a bi-racial, up from the bottom, community organizing, consensus building, wine-sipping, intellectually nuanced, constitutional law teaching, internationalist from the South side of Chicago by way of Hawaii are excellent example of how demographic changes “shift” foreign policy values and priorities.

Further our U.N. Ambassador Susan E. Rice and State Department Secretary, Hillary Clinton’s recent roll-out of the Obama Administration’s view of U.S foreign policy called for a ‘New Era of Engagement‘ with the world based on common values, shared interests and mutual respect.  Similarly, the development of official government websites such as America.gov that conveys the America we aspire to as a nation.

Despite the impact of the global economic crisis, GDP growth in Africa has declined from a robust 6.0% in 2007 to 5.1%  in 2008, and is expected to be 2.6%  in 2009 and then a rebound in 2010 based on World Bank estimates. And according to 2008 figures from the World Bank and the African Development Bank, global trade with Africa is approximately $500Bn, while the trade and economic potential of the continent is twice that amount at $1 Trillion.  The U.S. – largely driven by AGOA – accounts for only $66Bn of that amount, while Europe and increasingly China, South Asia and Brazil driving 80% of the remaining trade and commerce with the African continent. In addition, unbeknownst to most, Africa has joined the ‘space race’ led by the continent’s two economic powers; and several nations are developing close military ties with China and India which will help to fuel the emergence of future markets for military and technological commerce – directly competing with U.S. leadership in that market.

Further, non-traditional, but still every bit quintessentially American interests representing hundreds of billions in business, technology, entertainment, faith-based, professional sports, agricultural, food distribution and charitable interests increasingly owned or controlled by Native and African Americans, Latinos, East and South Asian Americans, and women need to have a voice in the development and execution of U.S. foreign policy as a bridge to expanding our national interest into new and interesting places that may pave the way for better relations with the rest of the world – not to mention increasing our global competitiveness and expanding national GDP.  Is anyone listening..??

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From HuffPo, Rev. Jesse L. Jackson –

We ignore Africa at our peril.

Africa Matters

In vital resources — oil, copper, diamonds, gold, timber and more — the continent is rich beyond imagination. Indeed, Africa is more breadbasket than basket case. The United States is projected to import some 25 percent of its oil from Western Africa in the coming years.  While the U.S. media pays Africa little attention, the Chinese leads by far in the mad dash for a share of the continent’s natural treasures. Using some of the money it makes in trade with the U.S., China is investing heavily across Africa, building highways, hotels, bridges and dams, seeking to lock up long term access to resources and the good will of African leaders. The United States is way behind.

The African continent will only become more important in the future. The whole world has a stake in what happens there. For decades, Africa was little more than a pawn in the Cold War, before that the playing field of competing imperialist nations. Now it is a key geographic territory in the fight against terror after al-Qaida blew up embassies in Somalia and Kenya. The continent’s mineral resources reinforce its strategic importance. 

 That is why I recently spent five days in Cote d’Ivoire, meeting with its current President and opposition leaders and addressing youth groups and religious figures, as the West African nation prepares for a crucial Presidential election on Nov. 29 — a day that will go a long way in determining the future of democracy in the region.  For most of its 49-year history as an independent nation, Cote d’Ivoire has been a shining light of a dimly viewed West Africa. Politically stable, culturally tolerant and economically vigorous, Cote d’Ivoire was and is a regional powerhouse. As one U.S. Embassy official described the nation of 18 million people to me, Cote d’Ivoire was to its neighbors what the United States is to Mexico and Central America. “This is where people went to find work,” the official said. “If this economy gets shut down you will see a dramatic impact on the entire region.”  Cote d’Ivoire produces 40 percent of the world’s coco and is a major exporter of bananas, coffee, cotton, palm oil, pineapples, rubber, timber and tuna. In recent years, according to U.S. Embassy figures, petroleum exports have risen significantly, and petroleum is now the country’s largest foreign exchange earner.  As I toured its sprawling port — the second largest in Africa — I saw five cargo ships loaded with fruit and vegetables headed to Europe. Abidjan, its biggest city once known as “Little Paris,” was a popular destination for tourists from the United States and Europe for years.

That was my message as I met separately with President Laurent Gbagbo and leaders of the two opposition parties who are vying for the Presidential Palace. I had a long and fruitful discussion by phone with Henri Konan Bedie, a former president running for his old job, and I sat down with representatives of Alassane Ouattara, who was out of the country, seeking medical treatment in Paris.

As I made clear whenever and to whomever I spoke, I was there not to support a candidate but to support the process of democracy. In addressing a pan-African youth conference and a meeting of Muslim and Christian religious leader I asked the people and the candidates to agree to three basic principles.

Number one: Campaign diligently and fairly.

Number two: Use the language of reconciliation and not destruction.

Number three: Publicly pledge to support the winner.

Sen. Edward M. "Ted" Kennedy (1932 - 2009)

‘For all those whose cares have been our concern, the work goes on, the cause endures, the hope still lives and the dream shall never die.’

The World's Central Bankers

The world’s central bankers and finance ministers emerged from this weekend’s Federal Reserve  annual Summer retreat in Jackson Hole, Wyoming (WY) amid growing concerns and debate in the world markets and financial centers about the outlook for a global economic recovery. One of the key issues on the agenda was whether, or not, to keep coordinated interest rates low in order to help boost world economic growth. Prolonged low interest rate environment can lead to persistent inflation if not delicately managed. Another central concern is whether the better and faster than expected rebound in China, Germany and France will dampen recovery in the U.S. and what impact this imbalance might have on international capital flows for trade and investments going forward. Central bankers warned that a global economic recovery shouldn’t delay an overhaul of financial market regulations following the worst banking crisis since World War II.

Federal Reserve Chairman Ben S. Bernanke said the global economy is beginning to emerge from recession after “aggressive” action by central banks and governments.  Among other things, he noted that “Economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good,” Bernanke said in a speech at the Federal Reserve’s annual symposium in Jackson Hole, WY.

Bernanke, speaking to an audience of central bankers and academics, warned that the world still confronts “critical” challenges. The note of caution underscored the Fed’s decision last week to leave interest rates near zero for an “extended period” and to delay by a month the scheduled end to its $300 billion program to buy U.S. Treasuries.

“Strains persist in many financial markets across the globe, financial institutions face additional significant losses and many businesses and households continue to experience considerable difficulty gaining access to credit,” Bernanke said. Recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”

While economists predict the U.S. will return to growth this year, they say the jobless rate is likely to rise beyond 10 percent, restraining consumer spending and casting a cloud over the strength of the recovery.

“Economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good.” Critical challenges still exists and “Strains persist in many financial markets across the globe, financial institutions face additional significant losses and many businesses and households continue to experience considerable difficulty gaining access to credit.” Recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”

Federal Reserve Chairman Ben S. Bernanke used the weekend symposium — which began on Thursday, and ran through Sunday – to single out the creation of rules limiting risk as one of the “difficult challenges” ahead. European Central Bank President Jean-Claude Trichet said “green shoots” aren’t enough for him to declare the recovery sustainable and cautioned that officials must do “an enormous amount of work.”

Swiss gov't earns $938Mn on $60Bn bailout.

(From NYTs) PARIS — Switzerland’s government said Thursday that it was in the process of selling its stake in the giant bank U.B.S., a transaction that it expects will generate about one billion Swiss francs, or $938 million, in profit for taxpayers. The Swiss government, in the throes of last Fall’s global financial crisis, stepped in to invest $60Bn in taxpayers’ bail-out funds to help that nation’s largest bank.

Officials confirmed details of the sale following a deal announced Wednesday to turn over information on wealthy American citizens who are clients of U.B.S., and are suspected by the U.S. Internal Revenue Service of using Swiss bank accounts to evade paying their taxes.

 In October, the Swiss government had injected 6 billion francs, or $5.6 billion, into the troubled lender in exchange for mandatory convertible notes that would have given it an 8.5 percent stake in the bank if converted. The government said on several occasions since then that it wanted to sell its stake as soon as justifiable, but that U.B.S. had to be on solid financial ground first.

The Swiss government and regulators now judge that to be the case in the wake of the deal with Washington and after a capital increase completed June 30 lifted the bank’s Tier 1 capital ratio, a measure of financial strength, to 13.2 percent from 10.5 percent at the end of March. Read more here.

Christina D. Romer, Chair of the White House Council of Economic Advisers

I came across this rather compelling post by Robert Creamer on HuffPo today. Creamer is a political organizer and strategist, and has been for almost four decades. He and his firm, the Strategic Consulting Group, work with many of the country’s most significant issue campaigns. He was one of the major architects and organizers of the successful campaign to defeat the privatization of Social Security. He is a consultant to the campaigns to end the war in Iraq, pass universal health care, change America’s budget priorities and enact comprehensive immigration reform. He has also worked on hundreds of electoral campaigns at the local, state and national level.

–

‘Even as Republicans blather on about the evils of a so-called “government takeover of health care,” economic news has provided two new key illustrations that the intellectual foundation of right-wing economic orthodoxy has collapsed. Despite the pseudo-religious psycho-babble of Right-wing economists such as CNBC’s Larry Kudlow, it has failed utterly. Supply-side and monetarist economic theories lead to income disparity and cowboy capitalism that leads to economic crises like the one we find ourselves in now.

First, the most recent economic numbers on changes in Gross Domestic Product (GDP) and employment made it increasingly clear that — as The New York Times reported last Saturday — the Obama economic stimulus and the massive government intervention in the financial markets were the critical medicine needed to prevent complete economic collapse.

It is now clear that, left to their own devices, there can be no doubt that private financial markets would have pulled the entire economy into another Great Depression. Though job losses continued, last month they continued to shrink from their massive January highs. At the same time, the contraction of the GDP dropped to its lowest level since Lehman Brothers collapsed last September.

Even as the Right continues to rail against President Obama’s stimulus package, there is now clear empirical evidence, and near-universal consensus that the $700-billion-plus stimulus bill is largely responsible for beefing up the GDP in the last quarter. Studies by the private research firms IHS Global Insight and MoodysEconomy.com concluded that it is already responsible for saving 500,000 jobs.

Everyday there is fresh evidence that government spending to stimulate demand was critically necessary to pull the country out of the economic tail spin caused by the reckless risk-taking of essentially unregulated private financial markets. Contrary to right wing theory, private consumer demand and new business investment are not leading the way out of the Great Recession — in reality, government demand was an absolute necessity. In short, Keynesian economic principles saved the day.

Next, the second piece of economic news tells even more about the bankruptcy of right wing economic thought.’ Read more here. . .

Susa E. Rice, US Amb. to the United Nations

I took note with great interest an announcement by U.S. Ambassador to the United Nations, Susan E. Rice that appeared on the Obama Administration’s White House.gov blog (www.whitehouse.gov).  Ambassador Rice, outlined the administration’s purpose and goal in the speech that was delivered later in the day at NYU’s Center for Global Affairs, and has been termed by the Administration a ‘New Era of Engagement’ with the world. Finally, it seems we have a President whose first instinct, in the face of an international crisis, is to resist the impulsive urge to blow the shizzle out our enemies as the first solution.  In the letter Amb. Rice also noted:

Everyone notices when a superpower becomes an agent of change—in word and deed, in policy and tone. We are demonstrating that the United States is willing to listen, respect differences, and consider new ideas. Even more importantly, we are advancing our interests and making Americans safer.

Today, as we steer a new course at the United Nations, our guiding principles are clear: We value the UN as a vehicle for advancing U.S. policies and universal rights. We work for change from within rather than criticizing from the sidelines. We stand strong in defense of America’s interests and values, but we don’t dissent just to be contrary. We listen to states great and small. We build coalitions. We meet our responsibilities. We pay our bills. We push for real reform. And we remember that, in an interconnected world, what’s good for others is often good for America as well.

Specifically, this development carries with it numerous implications with regard to our nation’s economic foreign policies and the myriad international relations emanating from it.  Amb. Rice noted, for example, that “We cannot champion important U.N. missions in Iraq and Afghanistan and then oppose the budgets to fund them.”  Further, she said the world body is “essential to our efforts to galvanize concerted actions that make Americans safer and more secure and as a vehicle for advancing US policies and universal rights.”

While US leadership is needed to tackle global challenges like nuclear proliferation, the financial crisis, mass atrocities, climate change and drug trafficking, “it is rarely sufficient,” said Rice, who has cabinet rank. She urged instead the effective cooperation of a broad range of friends and partners. Other countries, Rice added, “will likely shoulder a greater share of the global burden if the United States leads by example, acknowledges mistakes, corrects course when necessary, forge strategies in partnership and treats others with respect.”

Noting that in the age of globalization, troubles affecting fragile nations can menace strong ones, she made a call “to grow the ranks of capable, democratic states… that can deliver on both their international responsibilities and their domestic responsibilities to their own people.”

Adding that “We are demonstrating that the United States is willing to listen, respect differences and consider new ideas” with global partners.  “There is no substitute for the legitimacy the UN can impart or its potential to mobilize the widest possible coalitions,” Rice said in outlining President Barack Obama’s new diplomatic priorities, including a commitment to work constructively with nations large and small.

Read more here. . . 

Source: AFP newswire with reporting by Gerard Aziakou. 

Americans in China

The New York Times featured an interesting article in today’s paper spotting a trend that more college graduates and corporate professionals are flocking to China in search of greener pasteurs for their careers. It’s thought-provoking and something even I might consider. . .

BEIJING — Shanghai and Beijing are becoming new lands of opportunity for recent American college graduates who face unemployment nearing double digits at home.

Even those with limited or no knowledge of Chinese are heeding the call. They are lured by China’s surging economy, the lower cost of living and a chance to bypass some of the dues-paying that is common to first jobs in the United States.  “I’ve seen a surge of young people coming to work in China over the last few years,” said Jack Perkowski, founder of Asimco Technologies, one of the largest automotive parts companies in China.

“I didn’t know anything about China,” said Mr. Stephens, who worked on market research and program development. “People thought I was nuts to go not speaking the language, but I wanted to do something off the beaten track.”

Two years later, after stints in the nonprofit sector and at a large public relations firm in Beijing, he is highly proficient in Mandarin and works as a manager for XPD Media, a social media company based in Beijing that makes online games.

Jonathan Woetzel, a partner with McKinsey & Company in Shanghai who has lived in China since the mid-1980s, says that compared with just a few years ago, he was seeing more young Americans arriving in China to be part of an entrepreneurial boom. “There’s a lot of experimentation going on in China right now, particularly in the energy sphere, and when people are young they are willing to come and try something new,” he said

And the Chinese economy is more hospitable for both entrepreneurs and job seekers, with a gross domestic product that rose 7.9 percent in the most recent quarter compared with the period a year earlier. Unemployment in urban areas is 4.3 percent, according to government data. 

Read more here…

Glimmers of Hope

Listening to the prophets of doom on CNBC where I catch most of my daily entertainment, you’d think the election of Barack Obama as POTUS ushered in Armageddon.  The precise value of CNBC as your source of financial news and information is this: if you wanted to short a stock, catch Jim Cramer’s “Buy! Buy! Buy!” hot stock pick; or if you wanted know which CEO’s quarterly forecast not to believe, pick any CEO interviewed by Maria Bartoromo, CNBC’s “money honey.”  If you wanted to learn how to butcher the English language, you could listen to yammering news readers – errr, I mean news anchors – like Wolf Blitzer and John King of CNN. Or for comic relief, you could tune in to the yahoos over at FOX news who, if President Obama were to walk on water their headlines would scream “Obama Can’t Swim!” 

Obamanomics Team

 I mean, really, when you stop to think about

all the things our new President has accomplished in barely six months in office; the fact that the man acted decisively, in the public interest, and with all due haste to stanch the hemorrhaging economic wounds left by the previous eight years of what can only be described, to put it in polite terms, as “infierno!”  I’m surprised more people don’t consider President Obama a savior.  But seriously, in my considered opinion as a Wall Street professional, I track the numbers and follow trends – both qualitative as well as quantitative measures – and though you haven’t started hearing much about it yet in the MSM, there really are ‘gilmmers of hope’ on the economic horizon. Not least of which is that banks are lending and are profitable again. Morgan Stanley for instance re-paid a +20% annualized return on the governments bailout (TARP) investment; while Goldman Sachs’ return of bailout funds paid +23%. The President has posted better investment returns for American taxpayers in six months than their financial advisors have posted in the last six years!  Not bad…

Watch Economy: “Glimmers of Hope” in News  |  View More Free Videos Online at Veoh.com

Take the Obama stock market rally, for example – up an astonishing +45% since the Dow bottomed below 6500 on 9 March 2009, now trading in the 9,300 range. The stock market is a leading economic indicator. The markets moving higher indicates there is enough investor confidence in the future of the economy to risk capital that investors and companies will make money reflected by inflating stock prices. But stock market performance alone is not the full measure of a President’s effectiveness. In addition, national GDP is trending back up, corporate profitability is up, consumer confidence is up, along with consumer spending. These are very positive developments.  And the unemployment figures are equally as impressive: let me explain.  In January 2009, the month President Obama took office, the economy was spiraling – and quickly. Over 700,000 jobs were lost in January 2009, the month Bush left office.  Today, according to the July unemployment figures, the economy shed 247,000 jobs in the month of June. True, people are still unemployed and that’s never a good thing. But it equally true, and even more impressive in economic terms, that there are 500,000 fewer job losses per month than when President Obama took office.  Housing starts and sales are trending up, apparently after bottoming this Spring, and mortgage applications are up +20% vs same time last year.  The auto industry is generating revenues again as auto sales climb higher on the merits of the President’s popular and successful cash for clunkers program – even in the face of GOP opposition.  Think about it: the so-called “patriotic” Republicans – the party of “No” – by opposing, purely for partisan gain, the President’s efforts to drive economic recovery, Republicans are taking a firm stand against an economic recovery.  People, wake up!!  If you’re not persuaded by my take, then try these:

Consider the article in Forbes magazine (or view video interview here) this week by NYU’s Stern School Prof. Nouriel Roubini’s – sardonically called “Dr. Doom” because he had the good sense to call the Great Recession, with precision, fully three years before it happened – outlining impressive glimmers of hope for recovery throughout the global economic recession. (See Forbes article below)

Or Gail Collins’ cognitive wit in this piece about President Obama’s progress report six months in.

By Nouriel Roubini, Forbes magazine 6 Aug 2009

This week, I take a look at which countries have best weathered the global recession and credit crunch. All economies have been affected by the crisis, but a combination of policy responses and strong fundamentals has given some countries, especially some emerging market economies, a relative edge. These same strengths could lead the countries I highlight below to perform better as the global recovery begins, even if their growth rates remain well below 2003-07 trends.

What do these countries have in common? One major theme is that they tended to have lower financial vulnerabilities due to more restrictive regulation and less developed financial markets, as well as larger and stronger domestic markets that sustained domestic demand. Moreover, they had the resources to engage in countercyclical fiscal and monetary policies, actions that were not possible in past crises. In contrast, countries that borrowed heavily to finance domestic consumption in the days of easy money are now facing sharp economic contractions. Despite the relative strength of these countries, however, their ability to return to sustained growth will depend on structural reforms that support consumption.

Latin America

A couple of countries in Latin America have thus far been able to weather this crisis better than their neighbors. Brazil and Peru stand out for their relatively healthy fundamentals and financial systems. Both countries have benefited from being relatively closed economies and from having diversified export markets and products. They also took advantage of the boom years (2003-08), reducing external vulnerabilities and increasing savings (fiscal and international reserves). By the time these the crisis hit, both countries had well regulated financial systems that saved them from being contaminated by toxic assets. The fact that their domestic credit markets are at an early developmental stage, so consumption is not very dependent on credit, helped them shelter internal demand. Finally, these countries enjoyed strong policy credibility.

Brazil

The Brazilian economy is definitely showing signs of resilience, given the massive adjustments among the developed economies. As early as Q1 of 2009, GDP data showed signs of resilient consumption despite the contraction in investments and the collapse of the industrial sector. Throughout the second quarter, manufacturing continued to show very weak performance vis-à-vis 2008 levels, although the sector has shown some tentative signs of improvement on a monthly basis. In the meantime, the retail sector continues slowly to adjust to a much less favorable environment than in 2008, and sales growth keeps on moderating, due to slower real income growth and a challenging credit atmosphere. Yet consumer confidence, which has now almost returned to precrisis levels, could support consumption, despite the labor market losses to come. The central bank’s own assessment of the state of the economy suggests that the monetary and fiscal stimuli will remain in place to help the recovery process. The fiscal packages for infrastructure and the housing sector, as well as the tax breaks to the auto industry and capital goods sales, should in part support the labor markets and the expansion of domestic production.

Asia-Pacific

Australia

Australia narrowly escaped a technical recession by force of luck and policy. Despite a slowdown in global manufacturing activity, China and other emerging markets continued to tap Australia’s abundant natural resources, boosting Australia’s net exports in 2009. Meanwhile, a leap in fiscal spending and a reduction in policy interest rates prevented a sharp falloff in consumer spending and housing prices. Thanks to resilience in Australia’s twin pillars of growth, exports and domestic demand, expenditure GDP growth turned positive in Q1 2009. Production and income measures of GDP nevertheless indicate Australia is effectively in recession, but the good news is that the bottoming of production around the world suggests Australia will avoid technical recession this year and that its effective recession will be brief.

China

China’s aggressive fiscal and monetary stimulus helped reaccelerate growth in the first half of 2009 from a near stall at the end of 2008. Manufacturing is expanding, new orders are up and the property market correction has been clipped. Yet it remains uncertain whether the government’s response merely bought time. China’s stimulus adds its own risks, including those of asset bubbles, overcapacity and nonperforming loans. Yet there are some signs that, supported by government incentives, domestic demand has been stronger than anticipated. A sustained increase in consumption, which has lagged overall growth in recent years, would require a reallocation of funds domestically, likely through patching holes in the Chinese social safety net. The Chinese stimulus has been dominated by infrastructure projects, which could boost productive capacity but would do little about structural factors that keep national savings rates high. However, there could be space to implement some such countercyclical policies in H2 2009 and 2010. If so, the Chinese recovery could have greater legs and could provide more support to other countries. If these efforts fail or are delayed, however, Chinese and global growth could be much more sluggish.

India

Despite slowing from highs of 8% to 9% growth, India’s economy will grow close to 6% in 2009. Amid domestic and global liquidity crunch, large domestic savings and corporate retained earnings are financing investment. Sluggish labor market and wealth effects have hit urban consumption. But low export dependence, a large consumption base and the high share of employment (two-thirds) and income (one-half) coming from rural areas has helped sustain consumption. Pre-election spending, especially in rural areas, and high government expenditure, are also pluses. Timely monetary and credit measures have played a key role in improving private demand, liquidity and short-term rates and reducing the risk of loan losses. Credit is largely channeled by domestic banks, especially state-controlled ones, which have low loan-to-deposit ratios and little exposure to toxic assets. IT exports have held up despite repercussions on jobs and consumer spending. The oil price correction cushioned India’s trade deficit and large foreign exchange reserves helped the country withstand capital outflows in 2008. High returns in real estate and infrastructure and planned liberalization also helped boost capital inflows and asset markets when global risk appetite revived recently.

Europe

Norway

Although Norway’s economy slipped into negative growth in the fourth quarter, its downturn will be among the mildest of advanced economies, with analysts expecting a contraction in the range of 1.0 to 2.0% in 2009 and a return to growth in 2010. What set Norway apart are years of current account and budget surpluses (both in the double digits as a percentage of GDP), a sizable public sector and a hefty war chest of oil revenues amassed in the Government Pension Fund. Consequently, Norwegian policymakers have had ample room to use fiscal and monetary policy to soften the downturn.

Statistics Norway estimates the impetus from fiscal policy in 2009 to be 3% of mainland GDP–the strongest stimulus since the 1970s. Meanwhile, the benchmark interest rate is at an all-time low of 1.25%, down from 5.75% in October 2008. Also helping to alleviate the pain of contraction is the fact that Norway’s economy is well equipped with automatic stabilizers. Given Norway’s comparatively bright outlook, there is talk that the country will be the first among advanced economies to hike rates. The central bank sees the first hike coming in Q2 2010, though some analysts think it may come earlier.

France

The French economy managed to avoid a recession in 2008 and is expected fare best among the big four euro zone member countries in 2009. France’s more balanced domestic demand-led growth model has served it relatively better during a synchronized global downturn. The large social safety net fully served its automatic-stabilizer purpose in a countercyclical manner. Fiscal measures were targeted to the short term and included mostly nonrecurring spending. France’s relatively healthy banking sector received targeted support and is in a position to fully sustain the recovery in the euro zone.

North America

Canada

Despite relatively sound finances that helped it outperform the rest of the G7 in 2008 and early 2009, Canada’s exposure to the U.S. for trade and investment suggests its recovery may lag that of the U.S. (a trend that Q2 2009 data seems to support). However, a more consolidated financial sector with lower leverage, lower default rates and a revival of domestic demand should support recovery in 2010, albeit one characterized by below-potential growth. Canadian households and corporations still have more access to credit than their U.S. counterparts, a factor that helped buffer Canada from a more severe property market correction. Yet the nascent revival in consumption may be weaker than the Bank of Canada expects. The rebound in commodity prices is mixed news. Higher commodity prices and greater demand for metals, if not yet for oil and cheap natural gas, should contribute to an expansion of mining and energy output–but too strong a surge could boost the Canadian dollar, exacerbating Canada’s manufacturing weakness as it boosts labor costs.  Read more here…