How durable a recovery?

How durable a recovery?

Evidence is mounting that China is leading the world out of the global recession, but is China’s recovery, like the halting improvements in the U.S., for real or an unsustainable product of government stimulus and reckless bank lending? These questions are at the heart of the issue of whether the recovery that began in the second half of this year will pick up in 2010, with transportation volume resuming year-on-year growth, or fade to the point where additional stimulus is needed.

What appears to have been a narrowly averted panic over Dubai debt illustrates how overextended the global economy became and how fragile it remains.

China’s manufacturing grew in November at the fastest pace in five years, according to a purchasing managers index released by HSBC holdings last week. That is an indicator that, when paired with the nation’s 8.9 percent GDP growth in the third quarter, suggests an impressive rebound is under way and spotlights China as the principal driver of global growth.

But questions remain about how much of that growth is government-impelled via stimulus or government-encouraged bank lending that may not meet normal credit criteria.

On a recent trip to China, many experts I spoke with noted continuing overcapacity in sectors from steel to shipbuilding to marine terminals. The warehouse-distribution center sector has seen a burst of speculative construction in the absence of corresponding demand. There was considerable talk in China about domestic spending replacing exports, but that momentum has been slow, and China’s consumer spending is still tiny despite retail sales growing more than 15 percent during the first 10 months of 2009, 2 percentage points higher than in the previous nine months, according to government figures.

“You still have a huge overhang in capacity, and it is getting worse,” said Jonathan Beard, Hong Kong-based managing director for GHK Economic and Management Consultants.

Stephen Roach, chairman of Morgan Stanley Asia, a keen watcher of the China economy, is among the skeptics on the sustainability of China’s recovery.

As the full impact of the recession hit early this year, “Beijing turned the bank-lending spigot wide open,” Roach wrote on Nov. 19, with bank-funded, infrastructure-led investment spending accounting for some 95 percent of the 7.7 percent average GDP growth China reported during this year’s first three quarters.

“China’s recovery — and by inference, Asia’s newfound growth impetus — is likely to fade around mid-2010,” Roach wrote. “At that point, the bulk of the investment stimulus should start to wane, while any export-led follow-through should be constrained by protracted weakness in U.S. consumption, key to China’s growth in external demand. That points to the likelihood of a renewed slowdown of the Chinese economy in the second half of 2010, with significant ripple effects elsewhere in Asia.”

Supporting this view are weak port throughput figures in China, which reflect a long, slow trajectory out of recession and are clearly not mirroring China’s surge in GDP growth. That underscores how growth must be coming from elsewhere, and if it’s not from the consumer, it must be stimulus and lending, analysts say.

The role the U.S. will play in fueling recovery also remains in question.

Although business activity is picking up — the Institute for Supply Management’s barometer of manufacturing rose to 56.1 in November, the highest level since August 2008 — stubbornly high unemployment will continue to restrict consumer spending, hence the 1 percent decline in retail sails predicted by the National Retail Federation.

The U.S. consumer retrenchment is still very much evident at U.S. ports, where in October, a key peak season month, imports are expected to be down 15 percent year-on-year, according to IHS Global Insight. The company said it expects a narrowing of the year-on-year declines, and the first year-on-year increases in container volumes in nearly three years will be seen in early 2010 as inventories begin to be replenished.

In its latest forecast, PIERS Global Intelligence Solutions, a sister company of The Journal of Commerce, is predicting a sharp rebound in volume next year, with imports rising 13.6 percent after a forecast drop of 15.4 percent for all of 2009.

Perhaps that’s on the way. Beard noted air freight volume out of Hong Kong is recovering strongly and creating a spike in rates, suggesting the leading edge of an export recovery from China.

The past year for me involved reading history, including Jean Edward Smith’s biographies of Franklin Roosevelt and Ulysses Grant. Both men as president presided over the aftermath of financial collapse in the wake of economic bubbles, and both saw the recovery take years.

How different is what we’re going through now?

Peter Tirschwell is senior vice president for strategy at UBM Global Trade. He can be contacted at ptirschwell@joc.com