Wednesday, January 21, 2009

Data show abrupt slowdown in Japan and South Korea

By Bettina Wassener
Published: January 22, 2009

HONG KONG: Economic data from some of Asia's leading economies on Thursday highlighted the speed at which the region's economic growth is screeching to a halt, thanks mainly to sagging demand in the recession-struck United States and Europe.

Japanese exports, key to corporate giants like Sony and Toyota, plummeted in December, down 35 percent from a year earlier, the Japanese Finance Ministry said.

And the South Korean economy shrank 3.4 percent during the last quarter of 2008 compared to a year earlier.

Both figures were much worse than economists had projected, showing how hard it has become to assess the effect of the slowdown that engulfed the world last year in the wake of the financial crisis that began as U.S. mortgage-related problems in 2007.

Asia, once thought relatively well insulated thanks to its limited exposure to U.S. subprime mortgages, is now well and truly caught up in the worsening economic slowdown. The economies in the region have seen a major pillar of their economic growth - exports to the United States and Europe - collapse as consumers and companies there have slowed spending to a trickle.

"Signs the economy is stalled are rapidly growing more pronounced," economists at Goldman Sachs said in a research note about Japan on Wednesday. "A domino effect can be seen, with the impact of the recessions in major Western economies triggering production/inventory corrections in Asia and this, in turn, buffeting Japan."

Richard Jerram, an economist at Macquarie in Tokyo, said Thursday that the Japanese export figures were "predictably terrible."

"It's obvious that the availability of trade finance has shrunk dramatically, leading to a catastrophic decline in exports," he said.

The data Thursday - and likely poor economic growth figures from China later in the day - herald more pain to come as companies around Asia race to lower output and costs in response to sagging sales.

Numerous Japanese companies, which are suffering the added burden of a strong yen, have been forced to revise their earnings expectations and cut costs. The yen climbed to 13-year high against the dollar near ¥87 on Wednesday, before losing some ground to about ¥89.

Sony, which may report a loss for the financial year ending March, has already laid off thousands of workers, and is expected soon to announce details of wider restructuring measures.

The latest data also raise pressure on regional policy makers to step up their already considerable efforts to bolster their economies.

In Japan, the central bank has already lowered interest rates to near zero.

At the end of its policy meeting later on Thursday, it is expected to announce details of a plan to buy commercial paper in order to aid companies' efforts to fund their operations.

In South Korea, the central bank is seen cutting rates again at its next meeting on February 12. It has already lowered the cost of borrowing by 2.75 percentage points since early October.

Further rate cuts and stimulus measures are also expected in China, which has much more financial leeway to bolster its economy than many of its neighbors.


U.S. economy is in bad shape, but 1982 was worse
By David Leonhardt
Published: January 21, 2009

You often hear that we are now living through the worst recession since the early 1980s, and the comparison is not wrong. But it's ultimately unsatisfying, because it is a little too vague to be useful.

Is the economy only a little worse than it was in the last couple recessions, as some have said, and still a long way from the dark days of 1982? Or are we instead on our way toward something that may even approach the severity of the Great Depression?

Without more specifics, it is hard to judge the staggering stimulus numbers being thrown around Washington. It is hard to know how tough a task the Obama administration is facing — and whether it's running the risk of being too timid or too aggressive.

I thought it would make sense to get some clearer historical perspective, and the economists at the Bureau of Labor Statistics were nice enough to help me do so. In the last week, they helped me put together a broad measure of the U.S. job market — one including official unemployment and more subtle kinds — stretching back to 1970. Since the job market covers the entire economy and affects families in tangible ways, it seems to be the single best yardstick.

And it shows, for starters, that the economy is not yet as bad as it was in the early 1980s. It's not even that close to being as bad. The ranks of unemployed and underemployed, controlling for the size of the population, were much larger in 1982 than today.

But economies are a little like battleships. They turn slowly, and you can often tell where they are going before they get there. At The New York Times, we're discouraged from using the word "unprecedented." ("Use the term rarely and only after verifying the history," the New York Times style guide says.)

So suffice it to say that the serious recent declines in retail sales, business spending and employment make it highly unusual that the economy will improve anytime soon. The job market will almost certainly continue to worsen for most of 2009. Even if the much-needed stimulus bill passes, the economy is likely to end the year in roughly as bad a shape as its 1982 nadir. Which is saying something.

The recession of the early 1980s doesn't have a catchy name, and almost half of Americans are too young to have any real memory of it. But it was terrible — qualitatively different from the mild recessions of 1990-91 and 2001.

The first big blow to the economy was the 1979 revolution in Iran, which sent oil prices skyrocketing. The bigger blow was a series of sharp interest-rate increases by the Federal Reserve, meant to snap inflation. Home sales plummeted. At their worst, they were 30 percent lower than they are even now (again, adjusted for population size). The industrial Midwest was hardest hit, and the term "Rust Belt" became ubiquitous. Many families fled south and west, helping to create the modern Sun Belt.

As the pound falls, so does mood in Britain
By Julia Werdigier and Nelson D. Schwartz
Source: IHT, Published: January 21, 2009

LONDON: An island nation that bulked up on debt and lived beyond its means. A plunging currency. And a financial system edging toward nationalization.

With the pound at a seven-year low and still falling, and the British banking system requiring ever-larger rounds of government support, it is no wonder that observers in recent days have pronounced this city "Reykjavik-on-Thames."

While that judgment seems exaggerated, there are uncomfortable echoes of Iceland's financial downfall in Britain's trajectory. And for ordinary consumers, who enjoyed a long boom that transformed the drab United Kingdom of old into Cool Britannia, fears are growing that Britain could return to the economic stagnation of the 1970s.

The pound has dropped 7.6 percent against the dollar this week and 4.2 percent against the euro.

Even though there has been a steady drumbeat of gloomy economic news for months here, the mood this week has darkened dramatically.

On Monday, Royal Bank of Scotland warned that its 2008 losses could hit £28 billion, or $38 billion, even as Prime Minister Gordon Brown announced another bailout package. Ultimately, the British rescue effort could end up costing £350 billion - a step that echoes what the U.S. banking system is facing.

In contrast to last autumn, when Brown's first bailout effort was highly praised, this latest plan has been greeted with anxiety. And while few questioned the need for a quick response, the sheer scale of the borrowing being talked about, as well as the existing debt levels among corporations and consumers alike has alarmed many observers.

"I fully back what the government is doing, but there is a risk of being Iceland on the Thames," said Will Hutton, a veteran economic expert who is vice chairman of the Work Foundation, a nonprofit research firm. "And the more sterling falls, the greater our liabilities in terms of what we owe."

The pound, a symbol of British independence from the Continent, and revered here nearly as much as the Queen, has fallen precipitously. The currency has dropped 4.6 percent against the dollar over the last month and 29.3 percent over the last year. Against the euro, the pound is off 3.7 percent over the past month and 20.5 percent from a year ago.

By late Wednesday, one pound commanded €1.0688 and $1.3795.

Even more than their U.S. counterparts, borrowers in Britain turned to local banks to fuel a real estate boom that was as much a national pastime as a rational decision about how much to spend on housing.

Household debt as a percentage of disposable income in Britain hit 177 percent in 2007, compared to 141 percent in the United States.

Now, with both housing prices and institutions like the Royal Bank of Scotland buckling, the British economic outlook now looks even bleaker than the similarly troubled landscape in the United States and the euro zone.

Along with the pound, the FTSE index in London has fallen 1.3 percent this week, led by a plunge in the shares of many of the country's leading banks.

The government already controls a majority share in Royal Bank of Scotland, but a full nationalization has alarmed investors. That has led to a 63 percent plunge in RBS shares since Monday, while Barclays is down 32 percent and Lloyds Banking Group is off 54 percent.

The British economy is expected to shrink by 2.9 percent this year, compared with a 2.6 percent drop in the euro zone and 2.1 percent contraction in the United States, according to Gilles Moec, senior economist with the Bank of America in London.

To make matters worse, Moec said, the British government is facing a tidal wave of deficit spending, as tax receipts fall and the cost of unemployment benefits and other services rise. He predicts the budget deficit will equal 9.4 percent of gross domestic product, compared with 4.9 percent in the euro zone and 8.4 percent in the United States.

"It's scary," Moec said. "It reminds me of what you could find in southern Europe 15 years ago, during the worst years in Italy or Greece."

As in Iceland, banks, real estate and other financial services boomed in London in recent years, even as other swaths of the economy withered. In recent years, this sector has been responsible for about half of total job growth in Britain even though it accounts for only about 30 percent of the economy, according to Peter Dixon, U.K. economist for Commerzbank in London.

Traditional industries like manufacturing have faded in recent decades, unlike on the Continent where they remain a relative counterweight to the outsized problems in the financial sector.

The pound has experienced sharp declines before and each are still perceived as humiliating experiences that scarred the nation.

In 1976, the government was forced to approach the International Monetary Fund for help after the pound dropped below $2 for the first time. In 1992, the pound dropped out of the European exchange rate mechanism as interest rates hit 15 percent and Britain was in the midst of a recession.

A weak pound is also weighing on the psyche of British consumers, most of whom are cutting down on spending while watching a flood of euro- and dollar-rich tourists hunt for bargains in their shops.

But Jeremy Stretch, senior currency strategist at Rabobank in London, said Britons might have to learn that a weak pound can also be helpful.

"Normally, currency is associated with a kind of machismo, but now a weak currency is a benefit," Stretch said. "Apart from imported inflation, which is currently not an issue, you ask what's wrong with a weak currency."

Stretch also said that Britain's current economic problems were different from the 1970s and 1990s because it was not the only country now facing those issues.

"The salvation of the pound is that its problem is not a pound-specific problem," he said. "It's an ugly sister competition and at the moment we're looking the ugliest. But if you sell the pound, what will you buy?"

Julia Werdigier reported from London. Nelson D. Schwartz reported from Paris.

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