Global Recession Watch
co-written with RGE Monitor’s Lead Analysts
Which countries are at risk of recession in the global economy? Check out our overview: “Global Recession Monitor: Which Countries Are on the Brink of Recession?”
More likely than not, the U.S. will experience a recession. The housing recession and credit crisis are ongoing and their consequences are likely to be felt for quite some time – both in the U.S. and world wide. The U.S. housing sector does not look to be approaching a bottom quite yet. On the supply side, housing starts are down 57% from their peak, but on the demand side sales of new homes are down a whopping 62%. This certainly does not bode well for inventory absorption and keeps putting downward pressure on home prices – the S&P Case-Shiller indices that came out yesterday speak for themselves. And together with home prices, the wealth of the U.S. consumer – the engine of a U.S. economy that relies on consumption (72% pf GDP) like no other economy in the world – is estimated to have fallen by almost $2 trillion in Q1 2008 and is bound to fall further. If tax refunds and rebates are trying to hold up the mood of the U.S. consumer – whose confidence is dropping – energy and food prices are pushing the other way. And employment figures are contributing further to the dismal of the U.S. consumer. The big shock in the latest employment report was a spike in the unemployment rate to 5.5% from 5.0%, one of the biggest monthly rises on record, and the next employment report could mark the seventh consecutive monthly decline for payrolls and the sixth for overall jobs.
Canada’s GDP actually contracted by 0.3% y/y in Q1 on plunging inventory and residential investment, disappointing those that hoped it would decouple from its Southern neighbor which absorbs 75% of its exports. U.S. weakness, elevated credit costs, and a strong Canadian dollar are offsetting strong commodity exports and buoyant domestic demand. Yet, some economists suggest that real GDP strips out the very income gains that have increased Canadians wealth from its sustained terms of trade rise. With the Canadian dollar’s disinflationary power fading, the Bank of Canada may have ended its aggressive easing and there is little room for more fiscal stimulus. Lackluster growth looks likely for the rest of the year. See “Canada Recoupling With a Vengeance?” and Rachel Ziemba’s “Why Is Canada Growing Slower Than the U.S.?”
The risk of recession combined with above target headline inflation has increased substantially in the Eurozone in June. The latest PMI Indicator, which is normally a good indicator for GDP growth, points to a contraction in activity in both manufacturing and services for the first time in three years. The strong currency, high and rising oil and food prices, the credit crunch, and deteriorating external demand picture are finally taking their toll. Worryingly, the divergence in economic performance among large Eurozone countries is growing wider.
Spain and Ireland find themselves in particularly precarious positions after the bursting of their housing bubbles and a reduction in credit availability. In particular, Spain’s very large current account deficit at 10% of GDP raises the specter of sudden stops in case external investors decide to withhold financing. Portugal’s similar experience since the late 1990s shows that the adjustment period is potentially long and painful. Ireland rightfully belongs in the recession-likely league after experiencing one of the worst-performing housing markets in Europe in the second half of 07 when house prices fell by about 7%. Forecasts for 2008 GDP have been pared down significantly, due in large part to an expected contraction in housing investment of about 30%.
Italy’s economic activity has been contracting since May and the very low Q1 GDP growth reading of 0.4% leaves little room for optimism. While Italy managed to avoid major economic imbalances in the private sector, fiscal shortcomings and structural competitiveness issues remain a drag.
The UK economy is facing a difficult combination of sluggish economic growth and threatening inflation levels on the verge of a severe credit crunch and a tumbling housing market. House price indicators have been showing consecutive rounds of deterioration with prices now declining by nearly 4.0% y-o-y, while sales to stock ratio continue to predict further deflation. Mimicking the U.S. economy, consumption is pulling back as the housing market collapses, while confidence falls in the wake of a negative wealth effect from falling home prices. The Bank of England initially looked to provide liquidity to the banking system and lowered base rates to cushion the economic slowdown. Nonetheless, inflation – as well as inflation expectations – have edged higher, with headline CPI now above the upper ceiling of 3.0% y-o-y. Current market estimates call for an extended period of above-target inflation readings, while the housing slowdown continue to push growth forecasts to the downside for 2008 and 2009. While market participants are not yet pricing a recession in UK, a worsening of the delicate balance between inflation and an economic slump could increase the odds of a more severe slowdown.
Those in the emerging market universe are not immune to flirting with recession, as highlighted by the Baltic states. After a decade of fast growth, all three Baltics look headed for a sharp slowdown, with some analysts calling recessions. Both Latvia and Estonia contracted in Q1 (-1.9% and -0.5%, respectively), while Lithuanian growth was largely unchanged. Saggi
ng domestic demand is the main driver of the slowdown, propelled by tighter credit and a property-market collapse. Adding to Baltic woes is double-digit inflation, which is eroding consumers’ spending power and leading to talk of stagflation.
New Zealand is likely in the midst of a mild recession that began after a Q407 bump in GDP growth. Consumption (60% of GDP) has declined as urban households, the majority of New Zealanders, find themselves squeezed by a bursting housing bubble, high debt servicing burdens, high interest rates, and high fuel and food prices. The service sector, which contributes two-thirds of real GDP, slowed to the lowest level of activity on record and drove the steepest quarterly drop in employment since March 1989. Even rural households have seen better days: a severe drought has cut farm production, keeping New Zealand exporters at the sidelines of the world commodities boom. Decreasing exports, plus the increasing profits paid to the foreign owners of New Zealand’s oil fields, will serve to widen the current account deficit, already at 7.9% of GDP. After hiking interest rates – the highest in the developed world ex-Iceland – the Reserve Bank of New Zealand has plenty of ammo to combat recession. The large current account deficit and looming rate cuts may turn the carry trade against the NZD, making foreign funding even harder to obtain but exports more competitive. Fiscal policy may also come to the rescue when tax cuts come into effect in October, along with the most expansionary federal budget in a decade that will turn the government surplus into a deficit next year. The consensus forecasts Q108 GDP growth at -0.3% q/q followed by another contraction in Q2. Stay tuned for the Q1 GDP and current account balance releases on Friday.
Finally, a global recession – defined as global growth at 3% – is still in the cards (with the IMF giving it a one in four chance in its latest WEO). Take a look at: “Global Economic Outlook for 2008: Recession Fears Going Global?”
Also in the Monitor:
*China Not Immune to Global Slowing in 2008?
*Hungary Monetary Policy: June Pause In Mini Rate Hike Cycle
*How Vulnerable Are CEE Markets To Global Turmoil?
No Responses to “Global Recession Watch”
david hill • July 15th, 2008 at 2:11 pm
Oil and the dynamics of the global market are such that all nations will suffer considerably due to the unprecedented financial turmoil caused by the financial institutions themselves. The worst of the problems in this respect has yet to come. Indeed, if we do not watch matters carefully and central banks around the world do not intervene constantly, it will take a very long time indeed to get out of our present crisis. But this is only the first fall-out from an economic system that cannot sustain the human experience in this century. The reason, it is built upon the premise that there will be no unsolvable problems brought about by the very few becoming rich year-on-year and the many becoming poorer. Common sense has no part with the present global economic development model and where we are all marching towards a time where life will literally become unbearable. I do not say this but all pointers clearly state this. Therefore the human experience will witness in the not-too-distant-future the ramifications of our present ways of development and which are at the opposite end of the spectrum to sustainability and human survival.In this respect when one puts the financial crisis together with changes in global climate, population at 9.5 billion at least by 2050 (UN projections), increasing crop failures and all the people in the developing/transitional world vying to have a standard of living of that in the West, we have basically the wrong thinking on global economics. For eventually this system has not the capacity to support and solve so many dire problems and can only eventually fail. Therefore we have to go to a more cooperative form of economics before it is definitely too late. The writing is now on the wall for all to see but where we insanely do nothing.Dr David HillWorld Innovation Foundation CharityBern, Switzerland
