Wednesday, 30 March 2005

Recession predictions and the outlook for Asia

Calculated Risk took a look at recession predictions and concluded that it is a mug's game.

Nevertheless, he joins in the game and, based on the yield curve and new home sales data, predicts: "I do not believe a recession is imminent. I'm just starting to watch for the early signs."

Barry Ritholtz at The Big Picture reviews the analysis done by Calculated Risk and concludes that it is consistent with his own "expectations for a contraction in 2006/07 time frame".

The Conference Board did report yesterday that its consumer confidence index fell to 102.4 in March from 104.4 in February. This by itself does not necessarily point to an imminent recession, but it does suggest that investors should at least start watching out closely for signs of an economic downturn.

This seems especially true for Asian investors. Yesterday, following up on a post at The Big Picture that said that the stock market may be approaching a top, I said that Asian stock markets are likely to be among the first to fall, citing weak economic data coming out of Japan, South Korea and Singapore.

The pattern continues today, with Japan reporting a 2.1 percent fall in industrial production in February. Offsetting this news, though, is the findings from a survey showing that manufacturers projected industrial output would rise 0.9 percent in March and 3.6 percent in April.

Meanwhile, the two Brads -- DeLong and Setser -- have interesting posts on China:

Peering into the Future of China

China has about a quarter of the population of the world

But would China revalue the renminbi to address other imbalances?

While DeLong looks at China holistically, the latter two Setser posts are about China's currency peg and its accumulation of foreign reserves. These are all relevant to discussions on a possible recession.

As William Pesek Jr at Bloomberg warns: "China's money supply is still growing apace... A nation with a pegged exchange rate is hard-pressed to run an independent monetary policy... [I]f the dollar crashed under the weight of record U.S. current-account and budget deficits, or China experienced a hard landing, the entire global economy would pay the price."

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