Our new recession risk flows from the US car industry crisis in Detroit, to the stunning collapse in Japanese industrial production to the slump in Australian exports of iron ore and coal that feed global steel furnaces and electricity generation.
The official statistics now reveal a jaw-dropping contraction in world trade and industrial production following the explosion of the global financial crisis in mid-September last year.
Fears that this “real economy” shock will feed back into a weakened global banking system have stirred a new bout of share market jitters. On Thursday night, Wall Street broke through the crisis lows plumbed in November, revealing little hope in President Barack Obama’s new measures to pump-prime the US economy, repair bank balance sheets and stem the flow of housing mortgage foreclosures.
“We are currently right in the midst of the biggest decline in industrial demand on record,” says Goldman Sachs JBWere chief economist Tim Toohey.
Reserve Bank governor Glenn Stevens yesterday rehearsed a possible recession response to the growing likelihood that the Australian economy contracted in the December quarter along with those in most of the rest of the developed world.
“The deterioration in international economic conditions was so rapid that no policy response would prevent a period of near-term weakness in the Australian economy,” Stevens told the House of Representatives economics committee in Canberra.
Stevens pointed to the automobile sector as the industrial epicentre of the global financial shock. Global demand for new motor vehicles has dropped 20 per cent since August. Car sales in the major developed economies have reversed to early 1980s levels. In January, US car sales were down 37 per cent on a year before. General Motors this week again put out its hand for US taxpayers’ help as it announced 47,000 global retrenchments.
The global shock has hit even harder in Japan, which this week revealed that its economy shrank by 3.3 per cent in the last three months of 2008, the third quarterly decline in a row. Industrial production caved in by 20 per cent. In Tokyo for the fundraising, the ANZ’s head of Australian economics Warren Hogan tells Inquirer that Japan’s economy is likely to shrink further in the first quarter of 2009, pointing to Toyota’s production cuts. “It is quite profound the extent to which the export shock is starting to ricochet through industrial northeast Asia,” he says, pointing to the number of empty taxis in the streets of Tokyo at night.
Stevens noted that the Australian economy did not fall as much as 3 per cent from peak to trough over the entire recession of the early 1990s. “That is a very major contraction and it happened in three months,” he said of Japan’s slump. “So there is a very large global event going on.”
The US economy appears to have gone backwards by 1 per cent in the December quarter and is losing half a million jobs a month after declining by 0.2 per cent through the course of 2008. The British and euro economies were down 1.5 per cent or so in the December quarter. South Korea and Taiwan fell more than 5 per cent. The Reserve Bank estimates that Australia’s major trading partners, weighted for their share of Australian exports, contracted 1.75 per cent in the same three months. This is quickly hitting Australian iron ore exports, which fell an estimated 25per cent in volume terms in the quarter, along with a significant weakening in manufactured exports.
The Rudd Government now forecasts that the volume of Australian exports will inch 0.5per cent higher in 2008-09 and 2009-10, supported by the competitive stimulus from the sharply lower Australian dollar. That would leave the economy barely idling.
But Goldman Sachs JBWere forecasts that export volumes will fall 4 per cent in 2009 while export revenues — which will be further hit by price reductions — will by down 25 per cent by the end of the year.
And Toohey is struck by what he estimates is an 8 per cent fall in global industrial production in the year to the December quarter. Strip out China and that becomes a 10.5 per cent slide. Outside China, East Asia could be down 13.9 per cent on the year, double the fall during the Asian financial crisis.
“Without a clear turn in industrial production, Australian export growth will almost certainly fall by more than we currently predict,” Toohey warns.
This would hit an Australian economy that most likely already is in recession, despite the big injections of budget stimulus from Canberra and the Reserve Bank booster shot of lower interest rates.
Official figures this week revealed that the volume of retail turnover rose a less than expected 0.8 per cent in the December quarter, buoyed modestly by the Government’s $8billion-plus of pre-Christmas cash bonuses to families and pensioners. ANZ economists clipped their forecast for December quarter economic growth from zero to -0.1 per cent. Goldman Sachs JBWere tips -0.4 per cent.
The minutes of the Reserve Bank’s February 3 board meeting released this week suggest the December quarter gross domestic product result would be “broadly flat”. In the face of “very strong” headwinds from abroad, the fiscal and monetary policy stimulus would have only a “modest effect” in the short term. Retail sales had “weakened again” in 2009. That is, the Reserve Bank is girding for a GDP fall when figures are released on Wednesday, March 4.
The bigger issue is that the global downturn has been so abrupt and synchronised that no one is confident about it will play out.
Harold Sirkin, the Chicago-based head of the Boston Consulting Group’s global operations practice, points to global supply chains, tight inventory management and the new era of internet-facilitated international business for quickly transmitting the US-centred financial shock around the world. “It really is one world now,” he told Inquirer this week.
Given the slump in industrial production, it’s no surprise that the car and steel industries are generating most protectionist pressure around the world, such as Washington’s subsidies to Detroit and its proposed “Buy American” provisions that mandate only US-made steel can be used in infrastructure financed by Obama’s $US787 billion ($1.23trillion) fiscal stimulus.
But Sirkin suggests US protectionism will be mild and the international economic downturn will maintain the pace of globalisation as businesses and customers scour the world for lower cost supplies.
With Japan and the US going backwards, that leaves China as the big hope for cushioning Australia’s export slump. The Reserve Bank’s Stevens yesterday pointed to “tentative indications of a turn for the better in China in some of the most recent data”.
“China is the best placed country in the region to cope with this crisis,” the World Bank’s chief economist for East Asia and Pacific, Vikram Nehru, added yesterday.
Nehru suggested that the World Bank might not cut its 7.5 per cent Chinese growth forecast for 2009 much below 7 per cent, given the stimulus from Beijing’s $US586 billion fiscal expansion.
“And this is in an environment in which global GDP is going to be stagnant or shrinking,” he told Inquirer.
“China has an incredible capacity to mobilise economic agents — companies, banks, local governments.”
One statistic stands out from the current global slump in industrial production. For the first time, China is producing more cars than the US. The question is whether China can pull the world economy out of its worst downturn since the 1930s.