Double-dip recession unlikely, says Principal's Baur

There has been much talk of the potential for a double-dip recession, but the chief global economist of US manager Principal Global Investors doesn't believe that will happen, for a number of reasons.

During a trip to Hong Kong this week -- one of his four or five yearly trips to Asia from the firm's Iowa headquarters -- Robert Baur told AsianInvestor why he thinks a sustainable recovery is now in train.

First, the housing and auto sectors -- the typical drivers of the American economy -- are no longer subtracting from overall growth, but are expanding significantly.

The inventory cycle is the second factor. "The crisis meant that manufacturing production was slashed last year, which has left inventories way below the levels required for current sales," say Baur. "So business now has to raise production -- it can't continue with the record liquidations we've seen this year."

US corporates have been liquidating inventories for the past seven or eight months, he says, adding that this cannot continue, meaning there'll be more growth this year as a result.

The third driver of the recovery is that the deterioration in employment levels is slowing and that, hopefully, job losses will end in the fourth quarter.

Fourthly, says Baur, this is a synchronised global recovery, with all countries returning to growth at the same time -- partly due to the massive, synchronised fiscal stimulus that has been happening since last year.

All these factors are evidence that a recovery is happening, and once it gets going, it's "pretty typical" that there will be continued positive feedback. "Maybe the recovery won't be particularly strong," says Baur, "but it will be there." He doesn't hold to the theory that once the stimulus packages have rolled off there will be nothing to keep the recovery going.  "We think it's a mistake to think that," he adds.

Baur feels businesses and investors are tending to take a pessimistic view because things were so bad not so long ago that they find it hard to believe improvement is truly on the way.

As Mark Konyn, Hong Kong-based chief executive of RCM Asia-Pacific, put it yesterday at a press briefing: "What's going to keep the engine ticking over in the global economy? That's the big question."

As for events or developments that could obstruct the recovery process, Baur mentions three potential issues. One is protectionism, in the form of disputes such as that between China and the US over tyre taxes. "If that kept degenerating into tit-for-tat protectionist moves, it would be very damaging for the rest of the world," he says.

Another potential spanner in the works is the inability of certain parts of the credit markets -- such as asset-backed instruments -- globally to operate without central bank assistance, as in the US auto sector. "Those markets need to continue to open and loosen up," Baur says.

Finally, he points to the importance of US consumer demand. "If US consumers decided to raise their savings rate substantially, it would hit consumption and make the recovery more sluggish."

Principal Global Investors, part of the Principal Financial Group, manages just over $200 billion in assets (as of late September), down from a peak of around $250 billion in 2007. In Asia, the firm focuses on large institutions, such as sovereign wealth funds and national pension schemes.