Friday, September 25, 2009

Interesting Insight from OCBC

REGIONAL MACRO PULSE: Another jobless recovery for the US?

  • Easing layoffs amid still-high jobless rate. Although the pace of layoffs has subsided from the peak as more signs of economic stabilisation emerge, we expect the US unemployment rate to continue rising in the coming months and only recede gradually when the recovery takes hold. There are now widespread fears that the nascent economic recovery will be another jobless one.
  • When will it end? Jobless recoveries were seen after the 1990-91 and 2001 recessions when payrolls languished even after the recessions ended. It took between 23 and 39 months before the labour market returned to normal. As such, we foresee that the unemployment rate will remain elevated for some time even if the unemployment rate peaks in 2H2010 or in early 2011. As the current recession was preceded by a deep financial crisis, the jobless recovery could last much longer than expected, probably at least 45 months.
  • What causes a jobless recovery? The structural unemployment problem, higher productivity and a weak recovery of the manufacturing and housing sectors are among the factors that contribute to the likelihood of a slow recovery of the labour market. A slow recovery of final demand, weakened balance sheets and continued deleveraging by banks, corporates and households could force firms to continue shedding jobs in 2010, though at a slower pace.
  • Impact of a jobless recovery on private demand. Continued job losses, sluggish income growth and the pullback of consumer credit will continue to weigh on consumer spending. Sluggish labour market conditions in the US are having a big downward impact on incomes, with labour compensation falling sharply in recent months.
  • How much household deleveraging can we expect? The heavily indebted households will need to reduce debt and increase savings, implying a prolonged period of deleveraging. Private non-financial firms in Japan took more than 10 years to reduce their debt-to-GDP ratio by 30% pts to 95% in 2001 after the stock and property bubbles burst. It is estimated that the US household savings rate has to rise to 10% by end-2018 to push the debt-to-income ratio from 128% to 100% over the next 10 years. A rise in the personal savings rate of this magnitude would subtract about 0.75% pts from annual consumption growth and would act a drag on the recovery from recession.

I will leave readers to interpret :)

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