Will Global Economy Experience A Double-Dip Recession in 2010

In August 2007, the United States triggered what would be known as “Sub-Prime” Crisis then which later evolved into a Global Financial & Economic Crisis.

The crisis saw many renown financial institutions in the United States and across Europe seeking bailouts from their respective Governments using taxpayers’ monies. Financial institutions included in the bailout were Goldman Sachs, Citiigroup, Bank of America , JP Morgan and the worst of all AIG which was on the edge of bankruptcy. Not only were these financial institutions rescued, but there were even some which were left to collapse, notably Lehman Brothers, which incidentally was one of the main causes of the sub-prime lending in properties and real estates.

The crisis, the worst of its kind after the Great Depression of the 1930s, spreaded far across the Asia-Pacific region including Europe. Billions of dollars in rescue packages were dished out to provide liquidity in the banking system so as to prevent these institutions and businesses from collapsing which could resulted in more jobs losses and other societal problems eventually.

While these rescue packages may have withheld or even slowed down the crisis from worsening further, they have, however effectively, created a set of similar problem which is no different to that of the sub-prime. I will call it “super-prime” in this instance. The financial markets, properties and real estates prices have been soaring even way before global economy starts to recover. The speculative rise in properties and real estates prices are obviously due to cheap loans that are made available since financial institutions are already flushed with liquidity but so is the financial markets. This is effectively creating the same bubble that triggered the crisis. Considering the currently still-cloudy economic condition, especially the unemployment rate, and at the same time looking at properties and real estates prices in Taiwan, Hong Kong and Singapore will certainly leave no doubt that there are speculative activities going on in the property and real estates markets. (I have no wish to mention Communist China since most of their economic figures are mostly rigged!!) Were there steps taken to curb these activities? The prices of public housing in Singapore has gone up by more than 3% during the final quarter of 2009. Are these indications of an economic recovery? Well, think again.

We are not at the end of this recession. In fact, we are in the middle of it.

This will not be a V-shaped recession and recovery but it is certainly one that is going to be an Inverted-Square root-shaped, meaning we will have to go down deep before things start to really pick up.

And even if the economy stays flat, the stock market will almost surely head back down when financial markets began to realize what a jobless recovery actually looks like.

So, while the statistics may point to an economic recovery this quarter or next, the real world will be feeling recession pains throughout 2010.

Here are some reasons why the economy will stay flat or even decline in 2010.

1. LOSS OF WEALTH

People will not only feel poorer, they are poorer in real terms. Personal wealth will continue to decline in 2010, as inflation soars even further, fueled by a wave jobless and unemployment among local citizens. Strategic defaults in home mortgages will occur for home buyers, who inflated housing and properties prices by rushing to buy houses and properties during the late 2009, which will result in higher foreclosure rates putting downward price pressure in the real estates market

Hence homeowners will experience a commensurate loss of wealth as the value of their homes decline.

2. JOBLESS RECOVERY

Unemployment will put pressure on wages, which will remain stagnant, and longer hours worked. This all adds up to falling national income, which means consumers are afraid to spend money.

3. CUT IN CONSUMERS' SPENDING & CHANGE IN CONSUMERS' ATTITUDE

A fear of a loss of income will continue to squelch consumer spending and change consumers' attitudes. Most people I know are fearful about their futures -- i.e., losing their jobs or seeing a cut in commissions, profits, or wages. This means they will hang on to their pennies in 2010.

Bottom line: Consumers drive 70% of GDP, and a meaningful recovery will not happen without their dollars.

The change in spending habits will not be a passing fad. Frugal will be the norm in 2010 and beyond.

4. CHANGE IN BUSINESS SPENDING

Businesses do not see a turnaround in 2010. Even with public figures talking up the economy (and who can blame them, it's practically in their job description) businesses are not listening. If consumers aren't spending, why should businesses?

As the consumer continues to struggle, we will see businesses rein in spending further and push back hiring plans throughout next year.

5. GOVERNMENT SPENDING

In the past years, the government has increased spending and cut taxes to spur spending during times of economic crisis. However, this is no longer a serious option.

Simply put, the government lacks the tools necessary to significantly increase consumer or business spending in 2010.

What have Asian Leaders learn from the Crisis?

Donald Tsang, Chief Executive of Hong Kong, who had cautioned against the recent rapid rise in the property markets in Taiwan, Singapore and Hong Kong, had made known his fear for a double dip recession in the second-half of 2010. Japan is dishing out a US$ 80billion stimulus package to prevent its economy from falling into a double-dip recession.

With bubbles again started to form in a midst of a recovery especially in Asia, will interest rates be used as a tool to prick these bubbles? Why would happen next if interest rates started to climb?

Federal Reserve Chairman Mr. Ben Bernanke said, "never say never," when asked whether the Fed should instead use higher interest rates to pre-emptively prick future bubbles, and he later said he wouldn't rule it out.

Strategic defaults on mortgages will grow substantially over the this year and next among prime borrowers, and it will be identified as a serious problem. The sense that ‘everyone is doing it’ is already growing, and it will continue to grow amid low interest rates, to the detriment of mortgage holders. It will grow because of a building backlash against the financial sector, growing populist rhetoric and a declining sense of community with the business world. Some mortgagors will take another look at their mortgage contracts, and note that nowhere did they swear under oath that they would repay.

If this happens, then global economy will once again be dragged into another recession which is certainly going to be even worse then the initial one since the tail of the inverted square-root shows no end. However, on the other hand, with commodities prices, especially oil, creeping up again and showing signs of inflation, central bankers will be caught in-between pricking the bubble, which would cause the double-dip recession, and containing inflation.

Either way I look at it, 2010 is certainly going to be a year in which economists, regulators and governments alike will have to embrace a brand new economic model and a new way of thinking about how the modern global economy works.