V-SHAPED RECOVERY UNLIKELY

       The global economy is looking healthier, but several key factors rule out a return to boom times in the near future By Nina Suebsukcharoen
       The global economy began to move away from the precipice toward the end of 2008, said Sethaput Suthiwart-Narueput,an executive vice-president of the Siam Commercial Bank Group, but he believes the signs are fairly clear that a rapid recovery is unlikely.
       One indicator that SCB tracks closely is the Organisation of Economic Co-operation and Development's (OECD) industrial production index, because the US, Japan and the European Union have the biggest footprint
       within the group. The index shows that industrial output in these wealthy nations is picking up and this in turn means that exports from East Asia, including Thailand, should also pick up.
       Another positive for Thailand is that its economy probably hit bottom in terms of gross domestic product (GDP) in the second quarter of this year.
       Mr Sethaput remarked that the world was unlikely to see a repeat of big banks failing again, as happened in some Western countries last year, although there will continue to be bad news, mostly concerning smaller banks.
       "The commercial real estate market in the US is still bad, so smaller banks will still get hit because a lot of them have exposure to that. In Europe I think there will be bad news associated with their lending portfolios to Eastern Europe," said Mr Sethaput. He explained that the picture in Europe was a lot murkier than in the US because American financial institutions had no choice but to expose themselves since a lot of their business
       was securities-based and had to be "marked to market", an accounting term meaning that securities must be accounted for based on prevailing fair market prices. However,he added, lending portfolios in Europe enabled its institutions to hide the bad news a bit longer.
       "In Europe there will be more of a slow burn than anything else. But the point is, I don't expect that we will see any kind of big,sharp nasty surprises such as we saw in 2008 - really major banks going belly-up."
       He then interjected a word of caution,saying the global situation is not going to improve quickly, and the much hoped for
       V-shaped recovery is unlikely.
       Among the key reasons behind the projected slow recovery is that US consumers are still in difficulty. Figures on household net wealth in US show that this dropped fromUS$64 trillion to $50 trillion. The decrease amounted to one year of the US GDP.
       "That is how much wealth was lost in the US as a result of the housing market and stock market drop. People are not as wealthy as before and when that happens what do they do?
       "Like anyone else, they save more. So consumption is not going to pick up anytime soon. That, I think, is really clear and it raises the question of who is going to play the role of being the consumer and importer of last resort for the world."
       While a lot of people are talking about China's and India's transformation into economic giants and replacing the US in this respect, Mr Sethaput pointed out that these economies are smaller than that of the US.The 2008 US GDP was $14.2 trillion, compared to $4.4 trillion for China and $1.2 trillion for India."I don't doubt that China will grow very quickly and there is a boost I think for the world economy as a result of the growth of the Chinese middle class, but can it replace the US? The answer is 'No'."
       Mr Sethaput also pointed out that the seriously impaired credit mechanism will weigh down recovery. Global financial institutions have had to write down $1.6 trillion as a result of this crisis and this eats into their capital and seriously compromises their ability to give loans.
       "This is exactly what we went through in Thailand in the 1997 crisis, when the banks racked up a lot of losses. So the capital is gone therefore they are not as willing to lend. The whole credit extension picture is seriously impaired."
       He added that the securitisation market that fuelled housing and credit card loans through the repackaging of these loans into securities has now dropped off. This was running at $1.6 trillion a year at its peak, but has declined to $200 billion.
       "So the kind of credit-fuelled growth that we saw in the years preceding the crisis is just not happening. Our own outlook is that things are bound to rebound, probably toward the end of this year, but that doesn't mean that growth in 2010 and beyond is going to be that good, and we are going to be looking at sub-par, below-trend growth for quite some time in major developed economies."
       However, Mr Sethaput does expect to see a nice pick up in the figures toward the end of this year, which will lead many people to think that a sharp, V-shaped recovery has set in. He said such improvement would be due to many one-off - or one time only factors that will come into play and help the headline figures.
       Chief among these is the rebuilding of inventories, which has not taken place yet but is likely to start in the third or fourth quarter of this year. While the global economy will get an attractive lift from this, it is only a one-off move.
       The second factor concerns government stimulus spending, which will increase in the later part of this year and early next year,but once that money is gone the tap is dry unless new packages are introduced. Mr Sethaput is uncertain as to whether the US government would be in a political position to inject more cash.
       "There are a lot of these one-off factors that will make the near-term numbers in the second half of this year and early part of next year look good. But they will peter out. It's like a caffeine fix; you feel good for a while then it wears off. Then you want another fix."
       A NEW DAY:Mr Sethaput says the credit-fuelled growth of the years preceding the crisis is just not happening today.