Search This Blog


Friday, 14 November 2008

RECESSION - it's official?

The eurozone has officially slipped into recession after EU figures showed that the economy shrank by 0.2% in the Q3. This follows a 0.2% contraction in the 15-state area in Q2. Two quarters of negative growth define a technical recession. The news was widely anticipated and follows data showing that Germany, Italy, and Ireland earlier (and doubtless some others)are already in recession. Japan is officially in recession too. Once GDP figures are produced annually and readjusted with the benefit of hindsight we will see that US & UK were technically already in recession (first US then UK)before the Euro zone, which may yet revise their figures marginally upwards. A more compelling picture can be obtained when looking at all countries' GDP and GNP figures denominated in US$ and not in domestic or Euro currencies. Germany's fall into recession was to be expected of what some call the world's biggest exporter by value, which is not true; exports are about half that of the USA though almost equal to the value of OPEC oil exports. Germany's fall into recession was to be expected given its dependence for economic growth on net exports, not having generated much internal fiscal stimulis in the last two decades!
The US had the opposite outlook though 180 degrees off its stated policy of seeking export-led growth since 1992, it built up a deficit nearing $1trillion or 30% of its total trade, thanks to excessive domestic stimulis (credit boom economics that was also followed by the UK). Once the economy stuttered and halted improvement in the trade balance has cushioned matters including a recently rising $ until this slows exports that were rising on a falling $. I date US recession from the beginning of 2007, but that backward prediction will have to await official figures as they are revised (possibly in time for the Report of the President's Council of Economic Advisors in February 2009). Do you recall Greenspan's prediction. The rise in the US/Euro exchange rate has bolstered the US assets looked at internationally and is the most important factor alongside falling demand in bringing down the dollar oil barrel price and that of other $ denominated commodities. The $ has been supported by funds flow from emerging markets and Europe to the US plus the usual FX market currency short-selling whenever economic recession news offer secure short term one-way bets. It has been a charming strength of the management of US and UK economies despite the daily financial turmoil to fudge and postpone confirmation of official recession until many other countries are the first into the lifeboats.

No comments: