The biggest threat to the global economy in 2009 – MoneyWeek

The biggest threat to the global economy in 2009 – MoneyWeek

Takealookatanalysts’forecasts–sayforacompany’searningsayearfromnow。

Toooften,theyendupclusteringclosertoeachotherthantheydototheeventualoutcome。

There’saverygoodreasonforthis:likesoundbankers,it’sbettertobewrongtogetherthanbeconspicuouslywrongwithafar-outestimate。

Onceaconsensusisestablished,it’shardtoshiftawayfromit。

ThatexplainswhymostforecastsforAsia’sgrowthoverthenextyeararesoimplausiblyhigh。

Forexample,theconsensusstillthinksthatChinawillgrowbyaround8%through2009,despitestrongevidencethatgrowthcouldalreadybewellbelowthatandisclearlydecelerating

Globaltradeiscollapsing

Takethelatesttradedata。

November’sexportsfellby2。

2%year-on-year,downfromgrowthof19。

2%year-on-yearinOctoberandthefirstdeclinesinceJune2001。

Itwasn’tjustChina。

Othercountrieshaveshownevenworsenumbers:SouthKorea’swasdown18%andTaiwan23%,asyoucanseeinthechartbelowfromCapitalEconomics。

Someanalystsarguethattherefusalofbankstoprovidetradefinancetoexportersishavingabigimpactonthesenumbers。

ButIthinkthejuryisoutonthat–iftherereallyisunfilleddemandbecauseexporterscan’tshipgoodstobuyers,thenweshouldseeshortagesandrisingpricesinthesegoods。

Sofar,there’snosignofthat。

Givenhowmuchtheglobaleconomyhasdeterioratedinthelastfewweeks,it’snotunexpectedtoseeabigdrop-offintrade。

ButI’llconfessthatamovefrom+19%to-2%inonemonthhastakenmebysurprise–althoughperhapsinhindsightitshouldn’thave。

Wheneconomiesslipintorecession,thingsdeteriorateveryquickly。

Indicatorstendtotickdownforashortwhilebeforeplummeting。

Butthistimehasbeenalittleunusual。

ItlookedasiftheUSwasheadingintorecessioninearly2007–yettheplungehadn’tcome。

Thedomesticeconomywasclearlyweak。

Butitlookedasifultra-loosemonetarypolicy,taxcutsandthepromiseofhugefiscalstimulustocomemeantthattheUSwasmerelyslippingintoaJapan-stylemalaise,withouttheusualWileE。

Coyotemomentwherethegrounddropsawayundertheeconomy’sfeet。

WithUSGDPlikelytoshrinkby5%orsoatanannualisedratethisquarter,it’snowclearthatthiswasn’tthecase。

EventsweremerelydelayedbyrelativestrengthinEuropeandinthecash-richcommodityexporters;nowwithEuropeinrecessionandcommoditiesinfreefall,thingsaretakingtheirusualcourse。

TheUS,theconsumeroflastresort,isinsevererecessionandeverywhereelseisfollowingitdown。

“Thingsfallapart;thecentrecannothold;mereanarchyisloosedupontheworld,”asYeatsputit。

Othersignsofaslowdown

ThefactthatI’mquotingapoemcalledTheSecondComingshouldnotbetakentomeanthatIthinkthatArmageddonisathand。

ButtheoutlookfornextyearisgettingworseandAsiawillnotbespared。

Apartfromexports,thereareothersignsofapronouncedslowdowninChina。

Importsweredown17。

9%year-on-year。

Fallingcommoditypricesandlowerdemandforgoodsforre-exportundoubtedlyplayedapart,butthiscouldalsopointtoweakerdomesticdemand(althoughretailsalesstillremainstrongatpresent)。

Meanwhile,electricityproduction,whichisusuallycloselycorrelatedtogrowth,wasdown4%year-on-yearinOctober,asyoucanseeonthechartbelowfromCLSA。

Thatdropoverstatestheslowdown,sinceitreflectspower-intensiveindustriessuchassteelmakersandaluminiumsmelterscuttingbackonproductioninthefallofcollapsingglobalcommodityprices。

Butthereareplentymorewarningsigns,suchasweakercarsalesorthestill-flounderingpropertymarket,whereresidentialsalestoindividualsarenowdown18%year-on-year(seechartbelow)。

Chinaisslowingdown–andsoistherestofAsia。

Andgrowthwillcomedownfarmorethanmostanalystsareyetpredicting。

Theforecastsbelowarethebull,baselineandbearscenariosfromMorganStanley’sAsiaeconomicsteam。

‘Baseline’istheonethattheythinkismostlikely,buttomethebearcaselooksmorerealisticformanycountries,atleastfor2009。

Forsome,eventhatcouldbeoptimistic;Thailand’spoliticalupheavalhasdamagedconfidenceandbadlyhurtthetourismindustry,suggestingthatanoutrightfallinGDPismorelikely。

Thisoptimismdoesn’tonlyapplytoeconomists。

Manyequitystrategistsaretalkingofa20%fallinearningsasabaselinescenario。

Butaswe’vementionedbefore(clickheretoreadthisarticle:ItsnottimetobuyintotheAsianrallyjustyet),a50%fallwouldbemoretypicalinarecession。

Ahandfulofeconomists,suchasJimWalkerofAsianomicsandAndyXie,formerlyofMorganStanley,aremakingthecaseforamuchmoreabruptslowdowninChinanextyear:Walkerforecastsgrowthof0-4%nextyear(whichforaneconomywithagrowthtrendlikeChina’sisarecession)。

Someofthemoreindependent-mindedoutfitssuchasCapitalEconomicsandCLSAareexpectingrecessionsacrossmostofAsia。

Theseforecastscouldbetoobearish–butthey’relikelytobeclosertorealitythantheconsensus,atleastwhenitcomestothefirsthalfoftheyear。

China’sspendingspreewilltaketimetowork

Ofcourse,Chinahasconsiderablescopetoboosttheeconomy。

Thecentralgovernmenthasalreadyannouncedastimuluspackage,whileinterestratesarebeingslashedandloanquotashavebeenremoved。

ProvincialgovernmentshavetakenthisasagreenlighttoraisespendingandhavesubmittedRMB13trn-RMB20trn(estimatesvary)ininvestmentplansforcentralgovernmentapproval,althoughit’sfarfromclearhowmuchofthiswillbeokayedorfindfunding–especiallygiventhatthepropertyslumpishammeringprovincialgovernmenttaxrevenues。

Mostrecently,centralgovernmentannouncedmeasurestoboostconsumerspending,announcingdiscountsforruralresidentsonelectronicgoods。

Moreimportantthanthedetailoftheplanssofaristhesignaltheysend–thatChinawillacttokeeptheeconomygoingandthatmoremeasureswillfollowifthesedon’twork。

Giventherelativelyhighdegreeofcontrolthatthegovernmentexertsontheeconomy,ithasmoretoolsatitsdisposalthantheWest。

Forexample,apartfromincreasinggovernmentspendingevenfurther,itcandirectbankstolendmoreandstate-ownedbusinesstocontinueinvesting。

NothingChinaortherestofAsiadoesnowwilltakeeffectovernight。

Butbylatenextyear,theimpactofthestimulusprogrammesinAsiaandtheWestplushopefullythawingcreditmarketsshouldseethesituationbegintostabilise。

Atthatpoint,Asia’slowdebtburdenandhighsavingswillseeitinthestrongestpositionforarecovery。

AndasChristopherWoodofCLSApointsoutinthelatestissueofGreedFear,thereisapositiveangletothecrisis。

“Thespectacularcollapseintheexport-processingindustrycentredonGuangdongisforcingpolicymakerstothinkhardandfastaboutmeasurestopromoteconsumptionandnotjustinvestment。

Thisisamatterofurgencysincethereareanestimated26mmigrantlabourersworkinginGuangdong…manyofwhomwillnowbereturningtotheirruralhomes。



WiththeUSconsumerfinallyshopped-out,Asianeconomieswillbeforcedtorebalanceandstrengthendomesticconsumption,ratherthanfocusingsoheavilyonexports。

Thiswillnotbequickoreasy,andweneedtoexpectslowertrendgrowthevenwhentheeconomyrebounds–China’soverheated11-12%rateofthelastfewyearsislikelytobeathingofthepast。

Butit’sanecessarystep,bothforthenextstageofAsia’sdevelopmentasafinancialpowerandthestabilityoftheworldeconomy。

Protectionismisthebiggestthreat

Solong-term,theoutcomeofthecrisisshouldbeforthegood,althoughtherearerisks。

Manyofthemareoverstated:comparisonsbetweennowandtheGreatDepressionareproliferatinginthenews,yettherearehugedifferencesbetweenthetwoeras,rangingfromtherelativestrengthoftheglobaleconomy(backthen,thedevelopedworldwasstillrecoveringfromthedevastationofWWI)tothemistakesthatweremadeintacklingtheproblem(it’sunlikelythatmanygovernmentswilltightenmonetarypolicyandskimponpublicspendingthistime)。

Butit’snotimpossibletoimaginegovernmentstryingtoprotecttheirdomesticindustries,likeamoderndayrerunoftheill-conceivedSmoot-Hawleytariffactthatcrippledglobaltradeanddidsomuchtomakethedepressionworse。

ThesemeasurescouldincludeChinadevaluingtherenminbitoprotectitsexporters,amovethatwouldinviteretaliationandriskstartingatradewar–thelastthingweneedatthisjuncture。

That’sprobablythebiggestthreattotheglobaleconomy–butit’sunlikely。

Therewasalotofagitationaboutadropintherenminbitwoweeksago,butthatmovehasnowbeenlargelyundone。

It’sclearthereareChinesepolicymakerswhothinkarenminbidevaluationwouldbeagoodidea–butit’sequallyclearthattherearemanywhorealisethatsincetheproblemisacollapseofdemand,acheapercurrencywouldachievelittle。

GiventhatthedropoccurredjustbeforeUStreasurysecretaryHankPaulsonvisitedBeijingfortalks,it’slikelyitwaspoliticalpoint-makingratherthananythingelse。

Thatsaid,ifwesaysubstantialprotectionistmoveseitherinChinaorelsewhere–Iwouldbecomemoreworriedabouttheoutlookforthewholeworldoverthenextfewyears。

ThisisthelastMoneyWeekAsiaof2008–I’llbebackatthestartofJanuarywiththenextissue。

I’dliketothankyouforallyouremailsandfeedbackoverthelastfewmonths,andwishyouagoodholidayandahappyandprosperousnewyear。


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