Barclays Sees a Modest Recovery

Posted by: Joe Weber on July 06

economic_recovery.gif So what are some of the world’s wealthiest investors hearing about economic recovery these days? Conditions are generally better than they have been in months and the prognosis is for a shallow but very real rebound. Or so say the folks at Barclays Wealth Research, the big bank’s advisory service for the most well-heeled clients.

“Fears of a Great Depression have receded,” Michael Dicks, head of economic research, writes in the July 6 edition of Signpost, a quarterly publication of the British banking giant. “[T]he focus has shifted to the shape and longevity of the recovery. We expect a ‘deformed’ V-shaped business cycle, in which the up-leg has a shallower slope than the down-leg.”

In other words, after suffering through a painfully sharp economic decline, we now face a bounceback that won’t mirror the slide but instead is apt to be modest. With the U.S. economy alone losing 2.07 million jobs in the opening quarter and then another 1.55 million in the second quarter, as we reported in this blog on July 2, even a modest rebound would be welcome. And, indeed, there is reason to believe the slide has slowed.

With typical British understatement the Barclays analysts say the global economy and financial markets have proved to be “much better behaved than they were in the second half of last year.” They point particularly to emerging markets, especially in Asia, where they say the economic cycle has moved ahead of advanced economies.

Among the tea leaves they are reading are Purchasing Managers Indices, which are measures of business confidence based on order books at companies. “If we compare the PMIs in Brazil, India and China with those in the U.S., Europe and Japan, we see that the ‘BICs’ have all bounced back into growth-mode again,” the Signpost report says. “[B]y contrast, the ‘advanced’ economies are still finding their feet.”

On the consumer side, meanwhile, the analysts point to heroic efforts by government policymakers to rebuild confidence and so get consumers spending again. “Comparing retail sales (ex[cluding] autos) volumes across the major economies, it is clear that fiscal largesse, combined with attempts to lower borrowing costs and get credit flowing again, have helped turn things around for the consumer,” the Barclays analysts say.” This is more true in the U.S. and the U.K. than in Continental Europe or Japan.

The analysts argue that consumer spending will grow anew in the advanced economies, though not dramatically. They point to real wage growth, which is the growth of wages adjusted for inflation. So long as wages grow faster than consumer prices, consumers will feel comfortable spending. Further, they say, U.S. tax cuts and government spending supports only recently started to kick in and should drive demand. And they believe that employment declines will stabilize by year-end.

For investors, however, the analysts counsel caution. After this spring’s market gains, they don’t expect significant gains in investment until perhaps year-end. “This sort of macroeconomic scenario is rather more benign one than that which we experienced last year,” they say. “But is it an environment in which riskier asset classes – such as credit or equities – can soar? We rather doubt it.”

While he remains generally upbeat, Aaron S. Gurwitz, head of global investment strategy at Barclays Wealth, is flashing a yellow light for investors. “The great springtime global equity market rally of 2009 is now fading,” he says. “The rally reflected growing confidence that the global economy was not headed for a recession. That process is now complete. We remain optimistic for financial markets overall in the medium term, but suggest some caution for the next quarter or so.”

Indeed, the Barclays analysts say stocks and other similar assets “will trade sideways for a while, as investors contemplate what’s next.” What’s next could be either a sluggish recovery, one with some real oomph or “a sliding back towards the abyss.” The analysts put a 60% probability on the first possibility -- a sluggish recovery. Happily, they peg the chances of either a boom or a big bust at just 20% each.

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BusinessWeek’s Joe Weber, Patricia O'Connell, Michelle Conlin, Frederik Balfour, Peter Coy, Greg Spielberg and Roger Crockett examine The Case for Optimism by looking past the financial turmoil and economic unrest gripping the globe to focus on the promising future that lies on the other side of this storm. We’ll chronicle the forward thinkers investing in R&D, launching promising new products, entering new markets, or implementing management and leadership.

See why BusinessWeek Editor-In-Chief Stephen J. Adler is optimistic about the economy amid the sharpest downturn since the Great Depression.

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