SINCE March, global equity markets and risk currencies like the euro, pound and Australian dollar have rallied on the assumption that global demand will begin to recover by the second half of 2009. Markets have seen evidence of recovery among producers as various purchasing managers&rsquo; surveys from industrialised nations have beaten expectations. Demand has undeniably rebounded off the lows set in January and February when the world seemed to be on the verge of plummeting into the second Great Depression.<br /><br />Thus far, though, the consumer sector has shown no signs of revival as retail sales in the Eurozone and US continued to retrench for the second month in row. Consumer demand has been much stronger in commodity block countries like Australia and Canada where the rebound has had a positive result on jobs. But those economies are too small to have any meaningful impact on global demand.<br /><br />Although the common explanation points to reduced income due to the contracting labour market, some analysts believe the change may be more permanent. They suggest that Western consumers, especially those in the US, will no longer use debt to subsidise spending. US consumers will turn to saving to rebuild their net worth. Such action, though admirable from the balance sheet point of view, can be detrimental to recovery.<br /><br />In the US, consumption constitutes more than 70 per cent of GDP. In the Eurozone, the number is above 60 per cent. If frugality becomes fashionable, any increase in economic activity will be decidedly short-lived.<br /><br />For now, the market is giving the benefit of the doubt to the recovery bulls. But risk currencies &ndash; which are trading near yearly highs &ndash; remain vulnerable to a sell off if consumers do not loosen the purse strings anytime soon.<br /><br />Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read daily commentary on currencies at www.GFTUK.com/commentary or e-mail them at BorisandKathy@gftuk.com.