Signs of recovery for the global economy abound, led by the strong rebound in Asian emerging markets. More than just a matter of the region leading the way out of the worldwide recession, this foreshadows what will likely be an ongoing economic “power drift” to the East in the years ahead.

Whether the longest, deepest recession in 60 years is actually over, as some economists believe — or is merely in its waning days, as others insist — the prospect of a return to economic growth is on the horizon. And the Southeast Asia region is leading the way. Recent economic data, particularly from China, point to huge increases in industrial production and a resulting revival in gross domestic product growth.

China’s retail sales were up by 15.2% year-over-year in July and industrial production was up by 10.8%, according to a recent report from Toronto-based Bank of Montreal’s capital markets division.

“Korea, Singapore, Hong Kong and Indonesia all reported solid bounces in second-quarter GDP [even without much demand coming from the once mighty U.S. consumer],” the BMO report says. “While it would certainly be helpful for U.S. spending to stabilize and even grind out some modest gains, a sustainable global recovery really should be looking elsewhere for its growth leader.”

The hope now is that Southeast Asia’s recovery spills over and generates some much needed demand in the rest of the world, sparking growth there, too.

Indeed, in the early days of the downturn, some economists had theorized that emerging markets would help the global economy avoid recession altogether. That, obviously, was not the case.

In fact, as economists at New York’s JPMorgan Chase Bank NA, observe in a recent report, the big reason that the recession has been especially painful is that the negative shocks battering the economy were themselves global phenomena, which helped to ensure that no region was spared the pain.

“By the middle of last year, the first phase of the financial crisis, the resulting slide in household wealth and a surge in commodity prices had already pushed developed economies down a path to recession,” the JPMorgan report says. “Against this backdrop, the sharp intensification of the credit crisis in [the fourth quarter] acted as an accelerant, amplifying the drags already in train and spreading the pain to the emerging economies.”

Now, however, the report suggests that these negative feedback loops may be reversing themselves: “With shocks abating and being offset by unprecedented monetary- and fiscal-policy support, it is only natural now to expect the recovery to be global. To be sure, Asia is leading the recovery, but all signs are now pointing to a strong and synchronized bounce in economic activity in the current quarter.”

Of course, not everyone is convinced that Southeast Asia’s amazing recovery is going to pull the rest of the world’s markets from their own economic slumps. Some economists are warning that these early signs of recovery could just be a pause in what will turn out to be a double-dip recession.

Indeed, there are plenty of reasons to worry that the bounce-back in emerging Asia may not spell imminent recovery for the rest of the world. These include factors such as a still weakening employment picture, constrained credit and household debt that remains excessive.

Certainly, the prospect of a prolonged household deleveraging process doesn’t favour a robust recovery — at least, not a recovery that is dependent on the U.S. consumer. As economists from the Federal Reserve Bank of San Franciscoexplain in a report published earlier this year, many U.S. households are likely to seek to reduce their debt in the wake of the financial crisis. If they do this by boosting their savings, the report says: “The deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates.”

Alternatively, if deleveraging occurs by consumers defaulting on that debt, either by declaring bankruptcy or letting their houses fall into foreclosure, those consumers will incur significant costs, including tax liabilities, legal fees and ruined credit ratings, the bank report adds: “Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless.”

@page_break@There are other reasons to suspect that the developed economies may have more trouble joining the emerging markets in their recovery. For one, it remains to be seen how well policy-makers do at withdrawing the unprecedented fiscal and monetary stimuli that have been pumped into the economy over the past year, and whether private demand will take its place. Remove the stimuli too quickly, and governments risk choking off the recovery; leave them too long, and risk stoking another round of dangerous asset bubbles.

There’s also the question of global trade, which was thumped by the downturn.

“One impact of the global recession that caught markets offguard was the abrupt and dramatic collapse of global trade flows at the end of 2008,” says a recent report from Toronto-based Toronto-Dominion Bank, which sees signs that trade is starting to revive, driven primarily by a rise in U.S. imports. “While we will likely not fully recoup the ground lost over the next year, there is growing evidence to suggest we will see a much needed rebound in the growth of global trade flows before the end of this year.”

Although the U.S. might be able to spark a revival in trade from currently depressed levels, the country is not expected, in the years ahead, to be the dominant driver that it has been in the past. And that means countries such as Canada must look farther afield for new trading partners.

“In the wake of the global recession and the plunge in the Canadian trade balance to a deficit position, Canada is working hard to strengthen business ties with Brazil, Russia, India and China,” the BMO report says. “They have grown rapidly in the past decade and are likely to exit the recession as growth leaders once again.”

Indeed, not only are emerging economies, such as China, leading the way out of this recession, they are also expected to power world economic growth in the decade ahead. “The global capital markets are on the cusp of major change in demand drivers,” writes Henry McVey, head of global macro and asset allocation for Morgan Stanley Inc. in a report earlier this summer. “We are seeing a seismic shift in consumption/demand functions from the U.S. consumer to the emerging economies.”

Not only is emerging-market consumption more important in an environment in which U.S. spending is constrained by the recession, but emerging markets also boast much greater growth prospects. “The potential for consumption to grow in these economies is significant,” McVey’s report continues, “as it represents a small proportion of GDP vs the U.S. and other mature economies.”

To be sure, some of Southeast Asia’s current advantages are specific to this crisis. For example, the major financial institutions in the region were not significantly exposed to the sorts of toxic assets that are weighing on banks in the U.S. and Europe.

Moreover, it appears that Southeast Asian governments’ efforts to stimulate growth in the region are proving more successful than they have elsewhere. “While U.S. fiscal stimulus has yet to do little more than make already negative economic data less negative, the initiatives adopted overseas do seem to be gaining much more traction,” observes David Rosenberg, chief economist and strategist with Toronto-based Gluskin Sheff & Associates Inc. , in a recent report.

Another factor: consumers in Southeast Asia are traditionally savers, and so there’s not the need for a big deleveraging to take place among households, which would undermine a recovery. In fact, the region’s high saving and investment rates are also among the inherent advantages that are likely to drive its long-term outperformance.

It’s not hard to see why some economists expect Southeast Asia to overturn the old economic order in the years ahead. Countries in emerging Asia seem to be escaping the severe, global recession relatively quickly, and their bank and household balance sheets appear relatively sound. Add to that the underlying macro advantage of Southeast Asian countries’ more favourable demographics — working-age populations that are large and growing.

In a report that aims to examine how the global economy will evolve over the next 10 years, a report from Switzerland-based bank UBS Ltd. foresees overall lower global growth that is nevertheless led by emerging economies, with developed countries lagging notably behind. Ultimately, the UBS report predicts that, by 2020, emerging Asia will account for roughly the same chunk of global GDP as the U.S. and Europe combined.

In the report’s forecasting model, UBS analysts assume that globalization will be hampered somewhat, with slower trade growth and external trade finance more difficult to acquire in the years ahead. Yet the report says this won’t derail emerging markets’ growth. In the report’s base case scenario, which also assumes that global imbalances aren’t addressed, it predicts that global growth will average 3% over the next 10 years. This represents slower overall growth than in recent years, but the report also projects that developed economies will grow by an average of less than 2%, whereas emerging economies are expected to produce 5.5% annual growth.

For leading developed economies, such as the U.S., Britain, Japan and Germany, the UBS report forecasts growth hovering at slightly more than 1% — although Canada fares better, at slightly less than 3%. Weak growth is forecast in these developed economies because of factors such as their underlying demographics (aging populations) and low savings and investment levels, as compared with some of the developing countries. China and India are expected to be the big sources of growth. To a lesser extent, countries such as Indonesia, Singapore, Thailand, Argentina, Mexico and Chile are expected to contribute global growth as well.

Under an alternative scenario, in which globalization stagnates and countries such as the U.S. that run large current-account deficits find it harder to fund their consumption by borrowing from countries with large surpluses, it is the developed economies that will suffer more, while emerging economies will hold up better.

In these circumstances, the UBS report predicts, global growth wouldn’t necessarily be affected that much, averaging a slightly lower 2.8% per year, because emerging countries would see their average growth trimmed only to 5.2%. But, the report predicts, developed economies’ growth would fall to an average of 1.5%.

In both scenarios, Asia is expected to lead the way, with average annual growth of around 7%. At that rate, the UBS report calculates, China would overtake the U.S. as the world’s largest economy in 2019, and it would come to account for about 18% of global GDP, compared with 16% for the U.S. and 12% for Europe. Additionally, Japan would be surpassed by both India and Russia.

Faced with a future like that, it’s no surprise that Canadian policy-makers are now cozying up to the BRIC (Brazil, Russia, India and China). Closer ties aren’t just Canada’s way out of the current recession; they are likely to be a central source of future prosperity. IE