Let's get the letters right

U, V, or W? No, this is not a test of your knowledge of the alphabet, but a question about recoveries, because they come in different forms, reflecting their relative vigour or sustainability, as Nouriel Roubini highlights in ‘ Crisis Economics: A crash course in the future of finance ' ( www.landmarkonthenet.com ). A V-shaped recovery, he explains, is swift and vigorous. “A U-shaped recovery is slow and underwhelming, and a W-shaped recovery is a double dip, in which the economy experiences a fleeting recovery, then plunges downward again.”

Predicting that, in advanced economies, the most likely scenario is a U-shaped recovery, featuring a weak, below-trend growth for a number of years, the author reminds that in 2010 the US unemployment rate reached 10 per cent.

Balance-sheet recession

The book informs that the ‘balance sheet' recession faced by the mature economies — in contrast to a recession driven by monetary tightening — can lead to a weak recovery, as every sector of the economy ‘deleverages'. “Though US savings rates rose above 4 per cent by the end of 2009, studies done by the IMF and other scholars suggest that this rate needs to rise to 8 per cent or higher in the next few years.”

One other indicator that points to a U-shaped recovery is evident in the corporate spending on capital expenditure, the author points out. Capex contributes to a rapid rebound, but unfortunately in this recovery, capex spending will be anaemic..

Inner circle of emerging economies

The ‘outlook' chapter in the book has a section titled ‘BIC? BRIC? BRICK?' devoted to the emerging economies. Except for parts of central and eastern Europe, emerging markets lacked the leverage in the financial and household sectors that became the Achilles' heel of many advanced economies, traces Roubini. He also underlines that these countries, having endured financial crises in recent decades, cleaned up their financial systems, followed sound fiscal policies, and insulated central banks from political pressure.

While the best-case scenario, therefore, is that most of the emerging economies will grow at a healthy clip as long as they stick with the market-oriented reforms and policies adopted before the crisis, a critical caveat is that these economies are not self-sufficient. They have extensive trading and financial ties to more advanced economies and cannot fully decouple from their problems, observes Roubini.

Potential of Indonesia

In the author's view, Indonesia may be strongest candidate to make it to the inner circle of the emerging economies. Though the country's per capita GDP remains low compared with that of other aspirants to BRIC status, it has remarkable potential, argues Roubini. He reasons that the country depends far less on exports than do its Asian peers; and that its markets in timber, palm oil, coal, and other assets have attracted major foreign investment. Concise and comprehensive discussion of some of the most topical financial issues.

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