The Government of Singapore Investment Corporation, the sovereign wealth fund known as GIC, announced last week it was sharpening its focus on developing markets after shedding 20 per cent of its value on badly timed investments in western assets, particularly in the US. The GIC is no slouch when it comes to identifying secular trends, and its shifting strategy suggests the developed and developing worlds are heading in opposite directions. While the outlook for emerging markets continues to brighten - the Morgan Stanley Emerging Market Index is at an all-time high of 62 per cent so far this year, nearly double the previous record set in 1991 - mature economies continue to drift.
Historically, the more severe the recession, the more robust the recovery. But the long-awaited US take-off that would hoist the rest of the world to recovery is so shallow it may end up in the power lines at the end of the runway. Talk of a W-shaped rebound, the painful and prolonged "double-dip", is suddenly fashionable after months of cautious optimism for a US rebound this year. September went out the same way it went in, with a stream of economic statistics distinguished only by their inconclusiveness. "One Thing's Clear on Economy: Mixed Signals", declared a headline in the September 1 edition of The Washington Post; "Economic News a Mixed Bag" the paper offered 29 days later. According to government data released last week, housing prices inched forward in July but consumer confidence wallowed last month, while manufacturing activity weakened and joblessness grew. Bullish forecasts of recovery by the fourth quarter are dissolving amid talk of the "new reality" of America's economic future: onerous federal deficits, undercapitalised and risk-averse banks, anaemic consumer demand and moribund growth rates. The US Federal Reserve is stuck with a stark and unappetising choice: attack America's record fiscal debt by raising taxes and cutting spending, which would pre-empt recovery, or continue to finance the federal budget with Asian investment at the cost of stoking inflation fears.
It was against this darkening tableau that several prominent economists last month issued veiled and not so veiled references to the dreaded double-dip. Nouriel Roubini, the famously bearish New York University professor, predicted that stimulus-fuelled US growth would collapse due to insufficient consumer demand. Mohamed el Erian, the maestro of the US bond giant Pimco, warned that the mix of large consumer indebtedness, timid bankers, high joblessness and public debt would undermine the prospect of a near-term recovery. William White, the former chief economist at the Bank for International Settlements, declared at a conference in Hong Kong that the global economy, with the US in the lead, was "almost certainly" heading for a double-dip downturn. The announcement last Friday that the US jobless rate rose to 9.8 per cent last month from 9.7 per cent the previous month did little to buoy sentiment.