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Economic Update 2009: Bulls vs Bears

After touching a dangerous high of 364 basis points late last year, the benchmark LIBOR-OIS spread reached to a level of 25 basis points on August 3, 2009. In layman terms, it indicates the extent of credit market rotations. The current levels are indicative of easing credit markets, which almost froze after the collapse of Lehman Brothers, and other major players on the Wall Street.
The signs are positive with companies reporting their Q2 results better than expectations. Among others, Goldman Sachs reported a jump of 46% in net revenues. Amid fears of sluggish growth, France and Germany have been robust performers on the GDP front. Contradicting all previous forecasts, the U.S. Economy is expected to register a growth of 2-2.2% in 2009. Weaker Dollar is likely to boost exports of the developing, especially, the BRIC nations. However, on the flip side, the unemployment rate in US remains high. Consumers are still not willing to spend – savings are taking precedence. Consumers and corporates, alike are trying to deleverage their positions. Although, the banks have eased their credit norms, comparatively, and interbank rates have fallen, the entities at all levels are not willing to raise loans. Nevertheless, the TED spread (indicative of credit risk in the economy) has also fallen to acceptable levels of 27 basis points. It hovered around 464 basis points in H2 09.
Predictably, one section of observers, is bullish on speedy economic recovery, while the other is bearish. Although, exact predictions are hard to come by, the overall the indications appear positive and the world economy is recovering at a much better pace than previously expected – better than the slowdown after the ‘Dot Com’ crash at the start of the millennium.

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