While there are signs of hope in recent economic data, the recovery is still not assured, cautions a new report from HSBC Bank plc.
In the report, HSBC points out that the global economic data in the past couple of months have generally improved, leading to hopes that a self-sustained recovery might finally take hold this year, without further fiscal or monetary stimulus. However, it recalls that the same conversations took place at the start of 2010 and 2011. “Yet by the second half of each of these years jubilation had quickly turned to disappointment,” it notes.
“In our view it all comes down to real income growth. The fundamental problem we have in the western economies is that real incomes have been stagnant for five years, making the required deleveraging a long and arduous process,” it says. So, until real incomes pick up, the deleveraging process will be long and painful, it suggests.
HSBC says that for real incomes to rise materially, “we need to see some combination of employment growth, wage growth and stable or falling household costs, such as gasoline prices.”
While there have been signs that the U.S. economy is moving in the right direction on these fronts, the report points out that there are reasons for caution. It wants to see these signs sustained in future reports, and even if it holds up, there are still questions about whether it can be sustained through the year, it says. In 2011, higher oil prices spiked early gains.
“But the other key factor, in our view, was the political deadlock around reducing government debt in both the United States and eurozone,” it says, noting that this issue is still unresolved and seems likely to return to the market’s attention. And, with credit conditions tightening, the ability of small and medium-sized firms to expand and create jobs will be hampered, it says.
“Even if we are positively surprised by the behaviour of politicians in the U.S. and eurozone, and the U.S. manages to maintain this pace of job growth, we have to keep bearing in mind the scale of the employment challenge ahead. We have seen ‘jobless’ recoveries but not one as bad as this,” the report says.
“There are undoubtedly some green shoots evident in the global economy. But we are acutely aware that we have been here before, with such rampant enthusiasm early last year. Political deadlock played a major role in reducing household and business sentiment in both Europe and the U.S., putting paid to the recovery by [the second half]. We remain concerned 2012 will see another repeat performance from politicians – and therefore economies and markets,’ it concludes.