China & co stand between world and "recession"

HONG KONG Fri Aug 15, 2008 7:15am EDT

People talk in front of an electronic board at a brokerage house in Wuhan, Hubei province, August 13, 2008. REUTERS/Stringer

People talk in front of an electronic board at a brokerage house in Wuhan, Hubei province, August 13, 2008.

Credit: Reuters/Stringer

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HONG KONG (Reuters) - Global financial turmoil that has caused Japan and major economies in Europe to shrink will bring more pain but probably not a global recession because of the emerging star power of countries like China.

Economists generally define global recession as growth in world gross domestic product that runs below a long-term trend as estimated by the International Monetary Fund. In other words, the global economy does not have to contract to be in a recession.

Whether a global recession is in the offing is important because it highlights the difference between a slowdown within a broader growth cycle and something more protracted and serious.

China will almost certainly get hit by cooling global demand, but after five years of double-digit growth the world's fastest growing major economy and other developing nations should contribute enough to global growth over the next few years to prevent a dip into recession territory, economists and money managers said.

This comes at a time when five members of the Group of Seven rich nations -- Canada, France, Germany, Italy and Japan -- have already seen their economies contract this year.

"I think we'll narrowly skirt a global recession and the reason is we'll get relative strong growth, albeit reduced growth, out of developing economies like China," said Stephen Roach, chairman of Morgan Stanley Asia in Hong Kong.

Roach defined a global recession as growth in world gross domestic product of 2.5 percent or less. The IMF in its April world economic outlook said growth of 3 percent or less would be enough to be considered a recession.

1-IN-3 CHANCE

Recession or not, possibly the worst financial crisis since the Great Depression has already lopped off about $10 trillion from world equity market capitalization, Morgan Stanley data showed.

In the U.S. banking industry alone, as many as 200,000 people could lose their jobs next year, according to consulting firm Celent.

For now, Roach saw a 1-in-3 chance of a global recession, which he called a "stretch," especially if China continues to spend heavily on infrastructure and investment and increases exports to other developing economies.

The IMF expects growth to slow to a still rather healthy 4.1 percent this year and 3.9 percent in 2009 from 5 percent in 2007, underpinned by emerging economies.

Mark Mobius, executive chairman of Templeton Asset Management Ltd, said he believed consumer demand in emerging markets would ultimately be one of the factors keeping the global economy out of recession. Mobius is a value investor who has long touted the inherent strength of emerging markets.

"What we like are the consumer plays. As much as possible we are trying to get exposure to consumer-oriented sectors, whether that is consumer banking or retail," he said in a phone interview from Turkey.

In addition to China, Mobius, who oversees some $40 billion in assets, likes the technology sectors in Taiwan, India and Korea.

STILL FEELS LIKE A RECESSION

Adrian Mowat, chief Asian and emerging equity strategist with JPMorgan in Hong Kong, also is bullish on the tech sector in Taiwan and consumer discretionary plays but has a stronger preference for the financial sector in Asia.

He expects lower food and energy prices to ease inflation pressures that have plagued the region, and has been recommending to clients they switch from bets on the energy and raw materials sectors to sectors associated more with domestic growth.

"That call got a lot of initial resistance because it was the only part of peoples' portfolios that were doing well," Mowat said.

"To get investors to buy domestic Asia and domestic emerging markets is very difficult because the fear now is a rapid loss of economic momentum in emerging markets. We would argue that fear is overdone," he said.

Indications from Beijing point to a recent major policy shift to protecting growth rather than curbing inflation. While no government initiatives have been announced yet, many economists believe China's growth will not be allowed to drift too far below 10 percent.

Still, signs point to more slowing in the global economy in store even if it does not become recessionary.

For example, an index of the 10-year government bond yields of the Group of Seven rich nations weighted on the basis of GDP currently shows the lowest reading since 1980, at a mere 13 basis points, according to Reuters EcoWin.

The index has dipped into negative territory only twice in the last 46 years: in the mid 1970s for seven straight quarters and in the early 1980s for five quarters. Both of those periods coincided with rather severe U.S. recessions.

Yet, this time things seem to have been turned on their head. Acute weakness is located outside of the United States and the main engine of growth is in China.

"Here's the 'upside-down world bit,'" said Jim O'Neill, chief global economist with Goldman Sachs in London. "Q2 looks like the weakest period for Advanced Country GDP growth since late 2001, when the world was effectively in recession," he said in an email. "But this time, world growth still looks comfortably above 3.5 percent."

(Additional reporting by Jamie McGeever in London; Editing by Tomasz Janowski)

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