Still Can't Believe They Believed What They Did

I know I've been on this topic before, but I still can't believe that "strategists," analysts, investors, and the media were so quick to accept the Pollyannaish delusion that the rest of the world would be relatively unaffected by a downturn in the United States.

They went along with this canard even though U.S. gross domestic product is nearly three times that of the world's second biggest economy, Japan, and quadruple the output of China (which was just declared the world's third largest economy).

Some might even say that the ignorance reflected in that belief was almost on a par with the once popular notion that the U.S. would avoid recession in the face of losses of trillions of dollars of housing and equity wealth and the worst financial crisis since the Great Depression.

Regardless, the headline accompanying the following report by the Telegraph's Ambrose Evans-Pritchard, "OECD Warns Over Growth in China, Germany and Russia as Downturn Goes Global," should come as no surprise to loyal readers of the Financial Armageddon blog.

China, Germany and Russia are showing the fastest pace of deterioration among large economies as the entire global system succumbs to a "deep slowdown", according to the Organisation for Economic Co-operation and Development. 

The warning came as China's Banking Commission said it would prove "exceptionally difficult" to meet the country's 8pc growth target for 2009, the level seen as crucial to prevent unemployment from rising and setting off civic unrest. "The downside risk to the Chinese economy is even worse than expected," said the chief regulator, Liu Mingkang.

The OECD's gauge of "Leading Indicators" – which gives warning of trend changes a few months in advance – shows an abrupt rupture in Asia and among commodity producers, with the most damage surfacing in countries with an export surplus that depend on sending goods abroad.

The index for Russia has seen the sharpest slide, falling 4.3 in November, China fell 3.1 and Germany was down 2.0, the worst performer in the G5 bloc for the third month in a row.

China's exports began to fall in November as the global recession wrought havoc on the textile, toy and steel industries. The central bank has cut interest rates fives times in the past three months and let the yuan slip.

Premier Wen Jiabao said Beijing will broaden its $600bn (£405bn) fiscal stimulus package by bringing forward investment in science and technology projects. This may include plans for Chinese-built passenger jets able to match Boeing and Airbus. "Our aim is to be the first to recover from the financial crisis," he said.

Mark Williams, from Capital Economics, said the stimulus would not gain traction until the end of the year. "We think that growth could fall as low as 5pc this year [down from double-digit rates in the boom]. This is more bad news for commodity producers," he said.

Charles Dumas, from Lombard Street Research, said countries that rely too much on exports to fuel growth are starting to pay the price as they are at the mercy of forces beyond their control. "Chinese, Japanese and German exports have crashed," he said. "Savings gluttons suddenly look worse than deficit countries."

China has been spending 40pc of GDP on business investment, creating huge excess capacity geared to world markets. It is no longer tenable to keep building factories at this rate. "Business capital spending is driven by exports," Mr Dumas added. The question is whether Beijing can stimulate demand at home fast enough to offset belt-tightening by Chinese workers afraid of losing their jobs.

The OECD's data shows that Britain took its punishment early but is now declining at a slower rate than other major countries, suggesting that radical action by the Bank of England has begun to cushion the economy.

India and Brazil have both begun to tip over after holding up well in the early stages of the crisis, driving the final nails into the coffin of the BRICs (Brazil, Russia, India, China) story promoted by eager City banks at the height of the boom – at least for now.

It seems every corner of the world has at last been drawn into the vortex of recession.

Comments

[Jeff]

Anyone think there's some fudging coming out of China on economic data ?

[Nan Patience]

The real danger when these large economies decline are the geo-political, social and human costs. As much as we worry about liberty, freedom and justice in the United States, Americans are capable of holding things together in times of trouble.

[Tim]

Nan, I agree and disagree. Americans are less likely to take to the streets but it's far from out of the question. There is a great deal of anger in the country as the debt bubble unravels. Watts, 1965 and New York City,1863 are previous examples of such unrest. They had to sent federal troops into NYC to stop the violence. It did and possibly will happen here again.

[Let Us Have Peace]

Both the New York and Watts riots were draft riots. Minority groups - the Irish and blacks - felt that conscription was being unfairly directed at them. If Congressman Rangel gets his way, we could have them again; but this time they would be the majority protesting conscription by a minority.

[Jack Hammer]

Chrysler Financial, the credit arm of Chrysler LLC, is seeking $1.5 billion from the U.S. bank- bailout fund to increase loans to buyers of the struggling automaker’s vehicles.

Great..Cerebus investors get another Taxpayer Bailout!!

Enough!!!!!

[Dewey S.]

By taking to the steets is many times the only way the people's voice is heard. The statusquo will not make changes when their interest is to keep it bussiness as usual. This is the end of Maket forces.It's based on greed and exclusion. Look for a system blending socialism with capitalism (2/3 soc 1/3 cap) enough resources for all, with human rights in the forefront. It might sound too justice for some, but it's the only way to have a future.