Global Trends by Martin Khor

Monday 24 November 2008

Global economic outlook darkens

Any remaining hopes that the global economy will turn the corner soon were dashed last week with more big firms in crisis, and stock markets and currencies including in Asia in turmoil.

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The global economic crisis continued its spiral last week, with bad news in both finance and the real economy.

America’s second biggest bank, Citigroup, shocked the world when it announced a staggering cut of 52,000 jobs.  Its crisis became more deep-seated when its New York share price fell by about 60% during the week.  

As the bank has extensive business in Asia, the region will experience some fall-out, according to the Straits Times (Singapore) which reported 250 jobs may be shed in the bank’s subsidiary in Singapore and its credit is expected to tighten.

Another focus in the past week was the emerging crisis in the automobile industry, due to the weakening consumer demand for cars. Bosses of the three big American auto companies (General Motors, Ford and Chrysler) went to Congress to plead for a further US$25 billion loan (they already received $25 billion in aid) to stave off potential bankruptcy.

They have not succeeded so far. The US administration has drawn a line, that it will bail out important financial institutions (as failure may have systemic effects) but not crisis-stricken industrial companies.

Many Democrats have other views, and they have lobbied for a bailout of the Detroit car firms.  But unless they work out an acceptable scheme in Congress, they may have to wait till Barrack Obama takes over the Presidency next year before the industrial giants are saved.

The car industries in Asia and Europe are also in difficulties. In Thailand, General Motors is shutting its plant for two months.  In Japan, companies cutting jobs and production include Nissan, Toyota, Mazda, and Isuzu while in Europe the affected brands include Renault and Peugeot  

Meanwhile a trade dispute may be brewing over the effects of one country’s subsidies to its auto industry on the competitiveness of the motorcar firms of countries that do not subsidise.

The European Union was reported to be considering complaining against the United States at the World Trade Organisation for violating the rules that prohibit subsidies.

Evidence of recession continues to emerge.  Singapore has suffered its second quarter of negative growth.  Taiwan’s economy shrank 1% in the third quarter compared to a year ago. China announced a big jump in unemployment as many factories producing for exports closed.

Japan last week announced a shocking trade deficit as its exports fell almost 8% last month (from the previous year’s level).  In Britain, the Woolworth chain is in trouble, while Marks and Spencers held a 20% store-wide sale as the recession spread to retail sector.   And in the US, there was a 16-year high in people claiming unemployment benefits.

The proliferation of bad news caused stock markets to sharply fall for most of last week. Asian equity markets were the most badly affected, with big losses in Japan, Korea, Singapore, Hong Kong.

Just as worrisome was the plunge in the values of several Asian currencies, especially the Korean won, Indian rupee and Indonesian rupiah, which are the most susceptible to currency attacks because of the countries’ weak trade balance.

The currencies of Malaysia, Singapore, the Philippines and Thailand also weakened considerably against the US dollar.

The declines in several Asian stock markets and currencies signal the “flight to safety” of international investors seeking to avoid risk and shifting to the safe haven of US Treasury bills. 

Hedge funds are also unwinding their positions as redemptions by their investors increase.

As a result of all the above, there is a significant outflow of portfolio capital from many Asian countries, including Malaysia

When the United States and European countries took dramatic measures to bail out their banks and to pump funds into their financial markets some weeks ago, this raised hopes that the crisis may quickly subside.

These hopes have since been dashed as the crisis shifted from the financial sector to the “real economy” of industrial production, jobs and trade. Meanwhile the financial sector itself has not recovered.

Comparisons to the Japanese stagnation of the last two decades, and to the 1930s Great Depression are increasingly being made.

The use of monetary instruments like lowering interest rates seems to have been mainly exhausted, so the focus is shifting to “fiscal stimulus” or an expansion of government spending, as the best tool to counter the recessionary trends.

Just months ago, running a government deficit was seen as a very negative thing.  But economic orthodoxy has changed almost overnight.  Governments are now egging one another on to see who can spend more money.

Thus, the move by China to spend an extra US$580 billion over two years has made it an economic hero overnight and silenced its critics as the G20 finance summit in Washington.  In comparison the fiscal stimulus in other countries such as Germany and the United Kingdom are small.