9 April 2009

• The Great
We are Recession
facing a Great Recession, not a Great Depression
• This is thanks to a better-than-expected G20 London Summit, which helped to fix some
broken parts of the global financial system
• However, the fundamental imbalance in the global economy has yet to be addressed
• Among the G20 achievements are commitments to work together, to fight protectionism,
to recapitalise and reform the IMF, and to avoid competitive devaluation
• But the Summit failed to revive the WTO Doha Development Round, to secure more
fiscal stimulus, and to address the global imbalance
• Going forward, risks remain from possible further shocks in weak spots like emerging
Europe, and the impact of any second-round effects
• We remain confident that Asia will see a shorter and shallower recession than the West;
while China cannot save the world, it will lead East Asia out of the recession and drive
commodity prices higher
• Plus focuses on Asia, Africa, Middle East, FX, and Commodities, and highlights on
Angola, China, Hong Kong, and Mexico

Synopsis
Fixing the global financial system, partly
Overview: It is a Great Recession, not a Great Depression
This is not a Great Depression. But it has been called a Great Recession. How great
remains to be seen. It certainly is a deep crisis, the outcome of which will depend on the
fundamentals, the policy response, and confidence. Two key factors contributed to this
crisis. One was the imbalanced nature of the world economy. The other was a systemic
failure within the financial system, explained by a host of factors. In the future, we need
to see both a more balanced global economy and a financial system that works to support
this economy.
Asia: Resisting the temptation
We see little benefit from competitive devaluation, but plenty of risks. The G20
communiqué serves as a platform for Asian authorities to coordinate FX policy, and we
expect the Asian currencies to play an important role in adjusting global imbalances in
the long run.
Africa: The bigger picture
The onset of the credit crisis and the gradual realisation of the full implications of the
global downturn for African economies have given rise to much pessimism about the
region's prospects. Downward revisions to growth forecasts - even this far into the crisis -
are becoming more frequent. An increasing number of sovereign ratings are on negative
watch, with credit rating downgrades more probable than not.
Middle East: GCC economic overview
While growth is set to slow, living standards in GCC are generally high. Diversification
and openness are positive developments. Despite the cyclical slowdown, medium-term
prospects are positive. The region should be one of the first to recover, we believe.
FX: The day the music died
Foreign demand for US financial assets is weakening. The widening of the US fiscal
deficit should outweigh the narrowing of the current account deficit. Global recession
and deleveraging continue to support the USD. The USD should start to fall when global
economic expectations bottom out.,while the KRW is likely to recover when the global
financial crisis settles down.
Commodities: Looking beyond demand weakness
Commodity prices rose strongly in March, driven by a broad-based rise in risk appetite
following the Fed's plan to adopt aggressive quantitative easing and the Treasury's
Public-Private Investment Program. These, coupled with a stronger USD and some
evidence of a recovery in China's appetite for raw materials, helped to lift commodity
 Selected On-the-Ground reports:
Angola: Dipping into reserves
China: Masterclass: All men are created equal, and then stuff happens, Part I
Hong Kong: The curious case of the USD-HKD peg, Part II
Mexico: Mexico taps new IMF/US Fed swap lines
Forecast tables

OVERVIEW
Gerard Lyons
Chief Economist and Group Head of Global Research, Standard Chartered Bank, United
Kingdom, +44 20 7885 6988, [email protected]
• We are not in a Great Depression, but a Great Recession
• Thanks to a better-than-expected G20 London Summit, some broken parts of the global
financial system are being fixed
• However, the fundamental imbalance in the global economy has yet to be addressed
A Great Recession, not a Great Depression
Introduction
This is not the Great Depression. But it has been called a Great Recession. It certainly is
a deep crisis, the outcome of which will depend on the fundamentals, the policy
response, and confidence. Here, in the wake of the London Summit, I focus on the policy
debate. This analysis also draws upon a recent closed-door meeting of chief economists
from the private sector I attended at the Bank for International Settlements (BIS) in
Basel, and on the quarterly meeting of the Organisation for Economic Cooperation and
Development's (OECD's) Emerging Markets Network in Paris. There are three parts:
first, the G20 London Summit; second, the policy measures; and third, the present
economic situation and outlook.
To understand what is happening, it may be helpful to view current events as part of the
shift in the balance of power from the West to the East. This shift is not happening
overnight. It will take many years. But happening it is. And this not only has a bearing on
the recession we are currently in, it also has huge implications for the type of recovery
we are likely to see. Two key factors contributed to this crisis. One was the imbalanced
nature of the world economy. The other was systemic failure within the financial system,
explained by a host of factors. In the future, we need to see both a more balanced global
economy and a financial system that works to support this economy. But to get from here
to there is not straightforward and will take time.
Even though there is a need in the future for a more balanced global economy, the key
now is demand. Boosting demand, even if it delays the move to a more balanced world
economy, may be better than the alternative, which could be an ever-deepening
downward spiral. Equally, within the financial sector, it is vital to fix the parts that were
broken, but not everything needs fixing. Many parts of the financial system worked well
and, even in the parts that broke, there were well-run institutions that did not get into
trouble. All of which suggests the need to differentiate, from both an economic and a
financial-markets perspective, between the immediate outlook and the longer-term
issues.
1. The G20 London Summit
The London Summit of 1933 failed. Perhaps they needed Gordon Brown, Barack
Obama, and Hu Jintao to be there. These three were instrumental, it seems, to the success
of the 2009 London Summit. Some in Asia have even referred to it as the G2.5 Summit,
with the focus on China and the US, and the UK seen as good hosts! The Chinese were
proactive in the run-up to the summit, reflecting their desire to share - and to be seen to
be sharing - the common agenda of mending the economic and financial failures. Of
course, it was much more than G2.5.
Although generally referred to as the G20 (Group of 20) meeting, it was even bigger than
that, with 29 countries, groups of countries, and institutions represented around the main
table. The all-inclusive nature of this meeting was welcome given the synchronised
nature of the downturn. The very fact that this gathering was held was in itself a sign of
how things are changing. There has been a growing need for global policy fora to give a