Russia’s GDP Indicator Shows Marked Contraction

This post is partly about Russia, partly about how to follow the present economic crisis on a day to day basis and partly methodological.

So Which Are The Worst Affected Countries In The Present Crisis?

Obviously the simple answer to this question is “all of them”, and in particular all those countries who are members of the OECD. Perhaps that is the feature which best defines what is happening this time round (and which separates our present problems from, say, the Asian crisis in 1998) since this is a crisis whose focus has been, and still is, in what are often termed “the advanced industrial” economies, even though some of these are now more services than manufacturing-industry driven. But, come-on, within that ever so long list – which includes each and every member of the OECD (and a goodly number of those who aren’t) – who exactly are going to be the worst affected?

Well I don’t think I have made any secret on this blog that I think the principal focus of the present crisis is now situated in what Paul Krugman call’s Europe’s periphery – by which I would mean Central and Eastern Europe, Southern Europe, Ireland and the UK. To that list I would simply add those economies who are largely export driven, and who thus suffer most directly from the sharp contraction in global trade. In particular here Germany, Japan and China. My principal guess is that China is really going to be one of the worst case scenarious, and that consensus thinking still has some way to go in catching up with events here. Hong Kong based UOBKayHian have a Q4 estimate for year on year Chinese GDP growth of 6.3% for China (see here), and I think few people other than professional macro economists and bank analysts (and far from all of these if the truth be told) really realise what this means – it means the quarter on quarter rate of expansion was very low indeed, possibly verging on the negative. I’m guessing but it must have been somewhere in an annualised 0 to 2% range. This means we may well see quarter on quarter negative growth in 2009 in China, and that the possibility of a technical recession of two consecutive quarters of negative growth must be over 50% at this point. It wasn’t so long ago that the consensus was saying that annual GDP growth which was as high as 6% would be tantamount to a recession! Continue reading

Germany IS About To Have Its Worst Recession Since WWII

The German economy is about to suffer its deepest recession since World War II according to economics Minister Michael Glos speaking in an interview with the German newspaper Welt am Sonntag due to be published tomorrow (Sunday). Glos said growth in Europe’s largest economy is now expected to drop by as much as 2.5 percent this year (and there is still downside risk here). Earlier government estimates had been for slight positive growth (0.2 percent). This suggests that the miracle export-driven-recovery in German economic performance that so many were enthusing about in 2007 has actually been a short lived, one-off, affair, driven largely by an unsustainable lending boom in the UK, and Southern and Eastern Europe. If we take as good this year’s government estimate, it gives us average growth for the German economy over the last 10 years of 1.07%, hardly changed from the supposedly “correctional” pace attained between 1995 and 2005 (see chart below) – or is Germany’s lost decade now surreptitiously going to convert itself (like its Japanese equivalent) into the lost decade and a half?

Germany’s economy started contracting in the second quarter of 2008, and went officially into recession in third quarter. Further the Federal Statistical Office estimated this week that the economy may have shrunk quarter on quarter by as much as 2 percent in the fourth quarter (ie at an annual contraction rate of 8%), and that annual growth for 2008 may have been as low as 1.3 percent (non calendar adjusted – 1% calendar adjusted) – about half the 2007 level.

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December’s JPMorgan Global PMI Shows Just How Far The Infection Has Spread

OK, so now here’s the chart you really need to see (below). The JPMorgan Global Manufacturing PMI hit 33.2 in December, a series record. More to the point you can get a comparison between what is happening now and the 2001 “recession lite” with only a swift glance, and, of course, the 2009 long recession is only just getting started.

Now let’s stick it alongside the one Paul Krugman put up last week of the US Great Depression:

Now, arguably, what we can see here is that the current collapse in industrial activity is starting to get near the US historic one in terms of proportions, but we still aren’t quite there yet. What we could note that JP Morgan in their monthly report suggest that the present rates of output are equivalent to an annual fall of between 12% and 15%. Really to compare with the fall in the US we need to get up into the 20% region, but remember the global index is based on an average for 26 countries, and some of these are much worse than others (Japan, Spain, possibly Russia) and will already be around the 20% annual contraction rate in December. The point is also that the situation is still deteriorating, so hang on a bit, since it is not at all excluded that we will hit a 20% annualised contraction rate for the whole aggregate 26 sometime during the first quarter.

“The second half of 2008 has been dreadful for global manufacturing and the sector enters the new year mired in its deepest recession for decades. Manufacturing will therefore continue to weigh on world GDP figures, with December PMI data consistent with a drop in global IP of around 12%-15% saar as indexes for output, new orders and employment slumped to record lows.”

“The weakest performance was registered by Japan, whose output and new orders indexes fell to levels unprecedented in the histories of any of the national manufacturing surveys included in the global manufacturing PMI.”

“Employment fell for the fifth successive month in December, and to the greatest extent in survey history. All of the national manufacturing sectors recorded a drop in staffing levels, most at series-record rates including all of the Eurozone nations, China and the UK. The sharpest falls in employment were signalled for Denmark, Spain, the US, Russia and the UK.”

And watch out for the deflation backslap:

“The Global Manufacturing Input Prices Index posted 31.3, its lowest ever reading. The rate of deflation was especially marked in the US, were purchase prices fell to the greatest extent since June 1949. Rates of decrease in costs hit series records in the Eurozone, Russia, Switzerland, the Czech Republic and Denmark.”

And for those of you who are still sceptical that any of this has any validity, here’s a PMI/GDP comparison chart for Japan – GDP rates to the left, diffusion index PMI readings to the right (click over image if you can’t view too well). Not perfect, but not a bad guide I would say, if you like your football live, that is.

So never mind the depth, what about the duration? Well that is where I think that all of this will differ from what happened back then. As you can see in the US Great Depression Chart the 20% annual decrease went on for several years. At the present time I think there is no reason to assume that this will happen, ie that we will keep getting massive year on year contractions (in some cases maybe, Latvia perhaps?????), but activity does look set to fall to quite a low level, and there is no strong reason at present for believing it will simply bounce back up again. More than likely we will simply trawl the bottom, at least for some months, and who knows, maybe a couple of years.

Well that’s it for the big picture stuff, but I have actually been pretty hard at it all day down at the individual country level, so there is plenty more detail to come. In the next post.

The Second Great Depression Wends Its Way Forward in December

And lands in China.

Well China isn’t quite in Great Depression mode yet, but manufacturing activity – which forms the core of the Chinese economy and accounts for 43% of all activity – is already very close to a technical recession, and phew, it wasn’t very long ago that the Chinese economy was registering double digit growth. So the turn around is gigantic. The “close to technical recession in manufacturing industry” call comes from the people over at CLSA Asia-Pacific Markets, who compile the China purchasing managers index, and they base their judgement on the fact that their Chinese manufacturing index has now been registering contraction for five consecutive months. Continue reading

Despite The “Sudden Stop” Kazakhstan Won’t Be Calling On The IMF For Help

“The Kazakh government is ready to step in,” Kazakhstan’s Prime Minister Karim Masimov said this morning in a telephone interview with Bloomberg “The Kazakh banking system with the support of the government and central bank will fulfill all obligations to international investors…..We have our own specific plan to survive without any external support….I don’t think we need support from the International Monetary Fund or overseas.”

Well that is good news, so at least we know that one of the CIS and CEE economies won’t be looking to the IMF for bail-out support in this crisis which is presently growing by the day. So Kazakstan, that country which is reputedly host to reserves of approximately 95% of the elements in the periodic table, with a population of around 15 million housed on a surface area greater than the whole of Western Europe, is going to be able to look after itself. But hang on a minute, just where is Kazakhstan, and just what have they been getting up to over there, and why the hell should I take Karim Masimov’s word for it, when just about all the other Iceland Look-alike show contestants seem to be saying the same? After all, didn’t those extermely bright and able young people over at RBC Capital Markets in Toronto say in a report only last week that, along with Latvia, the country’s $100 billion oil-led economy is among the most vulnerable to the present global credit crisis and the skid-row economic trajectories that go with it simply because of its excessive reliance on short-term foreign borrowing. And isn’t it the case that the cost of protecting Kazakhstan government debt against default has more than doubled this month – to over 1,000 basis points (or 10%), the level for borrowers that investors term “distressed,” according to CMA Datavision credit-default swap prices. Only Ukraine, which as we know is already seeking IMF support, is classified as being a bigger risk among European emerging-market governments. Surely all those highly dedicated, bright, and extremely able young people who are doing all that trading know what they are about, don’t they? Continue reading