As we have just entered the second half of the year, there has been muted optimism from some analysts about growing signs of a recovery and the emergence of green shoots.  It hasn’t replaced the gloomy sentiment which has gripped the world economy ever since the subprime meltdown unfolded in the United States, but it is interesting to note.

Another aspect of note which is being fiercely debated at the moment is what shape a recovery will take when it eventually happens.  Some say a V, others maintain a U or a W.  Recently I heard one analyst say he believed it may take the form of an inverted square root sign.  So it’s all a bit of an alphabet soup really, stir it around and any shape may rise to the surface.

Shane Oliver from AMP Capital Investors, doesn’t rule out a V shape, but he thinks something like a U shaped recovery is far more likely.  He says what we have seen is a steady and steep drop which he predicts will be followed by a period of flat or very little growth.  In the short term, things will appear worse, particularly in Australia, as GDP is likely to fall in the June and September quarters.

But wait there is a bright side according to Dr Oliver… and that is… even though there are indicators of short term weakness, we will see signs of growth later this year and into 2010, which of course is upside of the U shaped recovery.

And Shane Oliver isn’t alone in his predictions.  Richard Martin from IMA Asia comes from the same school of thought, but is a little more robust in his views.  He believes we will see gradual growth in momentum as stock rebuilding leads to investment recovery and eventually a lift in employment, which means we will see more of an uneven V shaped recovery.

And even though most of the world is in recession, the IMF did upwardly revise its global growth forecast to 2.5% from a previously predicted 1.9%. Another positive is that a fall in oil prices has led to a reduction at the petrol pump, which of course always makes consumers feel better about spending.

Despite all this optimism, there are definitely others with opposing views…

Independent investment analyst Roger Montgomery says, historically the market is not always a great indicator and on this occasion he believes that the markets has got as little ahead of itself.  He maintains, we’re a long time off from justifying the recent rallies we’ve seen in share markets and he expects things will get worse before they turn up.

And as for those green shoots, Roger Montgomery puts them down to wishful thinking by investment companies which need to generate business and that’s why we are seeing this growing message that things are good, so hey jump on board.

On my recent trip around Asia it was interesting to note that while in Hong Kong it appeared that this “Special Administrative Region” may be starting to unwittingly suffer the slings and arrows of not necessarily outrageous, but an historically very good fortune.

There have been rumblings within the ranks of the central government that Shanghai would be better suited as “the” financial centre for China.  Shanghai’s State Council hopes to make this a reality by 2020.  This comes at a time when China continues to open itself up further to capitalism and aims to provide the salve to heal the world’s gaping financial wounds.

Similar to the plot of a Shakespearian play these comments have started out relatively benign, almost collegiate in tone – but of course we’re really only starting to see the unfolding of Act 1. However, there is an undeniable undercurrent, with some comments from Chinese authorities ringing with the subtle envy of a character, such as Fortinbras, longing to take centre stage. And despite the city’s party secretary Yu Zhengsheng hosing down those recent comments about Shanghai’s development.  It is precisely this, that is unnerving to those who are native Hong Kongers or have lived there long enough to consider themselves so.

Although at the moment there are more than several reasons why Beijing should and probably will let Hong Kong continue to play the lead role in a drama – which will no doubt rival even Shakespeare’s longest play (which is what I hear you ask – well Hamlet of course) rather than allow its understudy to take over at a time that would be jarring to the audience.

Glenn Maguire Chief Regional Economist with Societe Generale, has a case in point. He says Hong Kong will remain solidly in the spotlight because it is easy for foreign companies to do business there. The Hong Kong dollar is pegged to the greenback and it has a long history of being linked to the West. 

One thing’s for sure whether it’s Shanghai or some other mainland player, there’s no doubt Hong Kong has an understudy waiting in the wings…

Well overnight we saw the price of oil yet again gather momentum and trade above $71 dollars a barrel.

The move was off the back of positive economic data out of the United States which signalled a glimmer of recovery to some forces in the market.  This coupled with a possible supply disruption from OPEC member Nigeria, after Royal Dutch Shell suspended production in response to an attack on its pipeline in the Niger Delta, also helped to push the price higher in New York trade.

But it was only just earlier in the week that we saw the price of oil slip due to strengthening in the US dollar and a drop in share markets, which pushed it down by around 2% to $70.62 a barrel, well off its eight month highs of $73 dollars a barrel.

One growth story that continues to be in focus in relation to the oil market is China, particularly since its crude imports rose by 5.5% in May.  Jonathan Barratt from Commodity Broking Services says, the markets have viewed this as a big positive, but it can be dangerous because it’s pinning all its hopes on China to be the lynch-pin for the recovery.

The rally in crude has been driven largely by expectations that the emergence of so called green shoots will spark a recovery, especially in the United States and this will increase demand.

But the pace of the recovery still remains fragile and some traders are questioning the motives behind the surge in oil.  It appears the early signs of a recovery, may actually pose a bigger problem.

Jonathan Barratt maintains the market really needs to consider the implications of a higher cost in primary inputs.  He says, once the genie is out of the bottle and the price of fuel starts to hit the tipping point of $4 dollars a gallon in the US, consumers will then start to pare back their spending and this could hamper a turnaround in the economy.

So it’s still unclear whether those green shoots needed to underpin a solid recovery have really taken root.

Some analysts believe we have seen a solid and stable start to the recovery, but it won’t be smooth running either.  Instead it will strengthen in fits and starts, which means oil will remain volatile for the near future.

Well as the year takes off, the news continues of a slowdown tightening its grip. So what can we really expect to see this year? Will there be a steep and protracted decline, as many have predicted or is Asia in for a still difficult but softer landing than most?

In his latest report Richard Martin, Managing Director of IMA Asia, says there have been cautionery tales warning of a global correction for some time. He says, since 2006, the IMF has warned that a correction in the “global imbalance” lay ahead and that it would occur either gradually, with the help of changes to economic policies, or abruptly, as happened in the 1997 Asia Crisis. In 2008, the US financial crisis pushed the global economy into a rapid correction. The bad lending and regulatory practices that triggered the US crisis closely resemble those in East Asia a decade earlier. The US now faces a similar economic correction, but thankfully without a currency collapse or capital flight. Its recession, as a result, will be less abrupt and shattering than Asia’s in 1998. However, the scale of the reduction in growth for consumer spending and fixed investment over the next four years should not be mistaken.But if there is to be a recovery in the US, it is far off in the distance and more and more it appears that regional economies are suffering from the flow on effects of a drag in export demand from America and Europe. Initially China was touted as being the powerhouse to see us through the bumpy ride, but even the world’s factory is faltering. Richard Martin says, The problem for the world in 2009 is that while US demand has collapsed, an abrupt global rebalancing does not mean an immediate lift in Asian demand. Asia has stronger national, government, corporate and household balance sheets but it will not use these to lift spending in 2009, although they should soften the downturn. If anything, Asian consumers and corporates are cutting spending in the face of global uncertainty and a tough borrowing environment, which will exacerbate the 2009 global recession.

The global upturn in 2010 will be weak, but Asia, with better balance sheets, should lead it and over 2010-15 the rebalancing of global demand will emerge on Asia’s side of the Pacific with a steady lift in consumption and investment alongside a reduction in high levels of savings. Without any strong driver for global demand, 2009 will be marked by uncertainty, with conflicting signals on underlying demand until new trends are established in 2010.

Another area affecting the region is the global shakeout in the manufacturing sector, to offset this Asian economies must introduce initiatives to boost domestic production. According to Richard Martin, the long-term forecasts show a marked reduction is Asia’s trend growth, even though it will benefit from the global rationalisation of manufacturing and global rebalancing. Two factors are driving this. The first is an ageing population, with much slower workforce growth and rising dependency curves. The second is that for most of Asia the quick gains from rapid growth in export manufacturing are over. In much of Asia this is the one sector where productivity growth soared over the last 30 years, which drove strong growth in household incomes and GDP. Yet if Asia is to get an improvement in growth from 2010 it must push reforms that lift productivity in its domestic market. This is the crux of Asia’s long-term outlook.

Well after the fanfare subsides and the fireworks fade, when all the tourists have gone home and the media spotlight has turned its attention to the next big event, what will China have to show for its Olympics extravaganza?

In the early lead up to the Beijing Olympics there was much hype about the economic and cultural benefits the Games would bring to the worlds most populous nation. The Olympics were touted as an opportunity for the West and China to set aside their political wrangling and embrace in a warm all encompassing hug. After all they were launched on the 8th day of the 8th month in 2008, so surely that’s a good omen right?

Well recently there have been rumblings that, the old nasty chestnut, the U.S. subprime mortgage crisis, and the subsequent economic influenza which has swept the world, may be infecting the economic powerhouse that is China, which had long been considered to be bullet proof. Recently numbers showing that industrial output slowed for the month of July to 14.7% from 18.0% a year ago just strengthened concerns that an economic slowdown is taking hold.

Only in the past few days China’s benchmark Shanghai Composite Index, fell even further hitting a 20 month low. So far this year it has been the worst performing sharemarket in the region taking the dubious title from Vietnam.

So what do the experts think will be the lasting legacy of the Beijing 2008 Olympic Games?

According to Austrade’s, Chief Economist, Tim Harcourt, the benefits are there, both in terms of foreign investment in the lead up to the Games and with subsequent business deals which have been secured during the world’s greatest sporting carnival. “Being a part of the Olympics is always good for a country’s brand. It means more people go there and there’s also the boost in infrastructure. For China the legacy of putting on the Olympics will be the benefits of foreign expertise.”

But John Lee, visiting Fellow from the Centre for Independent Studies, is bearish in his views on the Olympic effect, “I don’t think the Games will result in a substantial economic boost for a couple of reasons, one is that Beijing is only responsible for about 3% of China’s GDP. But also China isn’t having problems securing foreign capital. There are figures for example that there’s about 200 billion dollars worth of foreign capital floating around the system in China looking for opportunities. So really there isn’t a foreign capital deficit.”

And Dr. Shane Oliver, Chief Economist at AMP Capital Investments is more pragmatic in his view, “The Olympics is really a showcase for China coming out. It’s more psychological then anything else and will neither cause a boom nor bust. The normal theory is that there is a slump in the host city after the Olympics because of the drop off in construction. But really Beijing is the most insignificant host city in relation to the country. The real issue is that some of the measures of growth across August and September may be affected by factory shut downs aimed at curbing pollution during the Olympics.”

So it seems the jury is still out as to what the lasting impact from the Olympics will be on Beijing and greater China. No doubt there will be some benefits, but when you drag out the abacus and start crunching the numbers whether those benefits are worth the 50 billion dollar price tag remains to be seen.

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