Correlations across asset markets have started to break down and the trend is likely to continue this year. Finance experts expect a rebound this year amid the lows of the last quarter of 2008.
The strongest quarter tends to be the one immediately following a deep plunge, said financial advise and investment banking services provider Merrill Lynch in its recent research report sent to Emirates Business.
Countries that have greater leverage would face greater problems and these are mostly in the developed markets, rather than the emerging world with "Japan and emerging Emea the main exceptions," said Alex Patelis, economist with Merrill Lynch.
The report said growth in the last quarter of 2008 was below the forecasts with industrial production and retail sales plunging.
"Yet history suggests that the deeper you plunge, the greater the payback. We find that growth in the quarter following a plunge of more than five per centage points is positive with a 69 per cent probability."
The present situation has created a synchronised displacement shock that temporarily interrupts most economic activities, this creates a massive downside spike followed by a rebound followed by a return to trend, said the report.
Detailing the downside spike in activity, Merrill Lynch said that it has extended beyond the initial expectation for October last year and extended to November and also December. "Industrial production, in particular, has absolutely collapsed everywhere, most notably in Asia. In addition, retail sales have been severely affected, paticularly those of durable goods, such as autos, which have seen a plunge of 20 per cent to 40 per cent year-on-year globally."
The situation "sets up for very interesting dynamics in 2009".
In a typical recession demand falls first, but production lags which lengthens the recession. This time, the collapse in demand and production have been almost simultaneous and it would be important to see how this unfolds.