Consider this: the annual rate of decline in industrial production in December was 12 per cent in Germany, 20 per cent in Spain and 21 per cent in Japan. South Korean exports were down 32.8 per cent in January, compared with the same month in 2008. The International Air Transport Association said global international cargo traffic crashed 22.6 per cent in December, year on year. It looks like global trade has been, and maybe still is, in freefall. This means that the global economic outlook could be a lot worse than we thought.
We have no data yet for global trade in December and January. The CPB Netherlands Bureau for Economic Policy Analysis estimates the volume of global trade fell by 6 per cent during November alone. It is a volatile data series, so we should not extrapolate. But judging by the latest figures from South Korea and other Asian countries, it appears the contraction in global trade must have continued during the past two months.
Kevin O’Rourke, professor of economics at Trinity College, Dublin, estimates the decline of global trade, peak to trough, during the Great Depression at a little over 25 per cent, and says that we are not there yet, but on present performance are getting there fast. What took the global economy three years to achieve between 1929 and 1932 might take us less than a year. The deep linkages between product and capital markets in the global economy are certainly part of the reason. But the speed at which global trade has been collapsing is nevertheless breathtaking. What is frightening is that we do not really understand what is going on.
There is some encouraging news to report as well. The Baltic Dry Index, a measure of global shipping costs and a highly volatile gauge of global trade, has risen from its depths in December, when it was down 94 per cent from its peak. It is now down only 86 per cent.
So will this be known as the Depression of the early 21st century? That depends on your definition of a depression. You could define it in terms of the rate of unemployment for individual countries, but since unemployment is a lagging indicator, you will not know whether you are in a depression until some time after the event. You could also define it in terms of peak-to-trough declines in economic growth and choose some nice round number as a threshold such as 10 or 20 per cent.
The Japanese economy is currently shrinking at an annualised rate of close to 10 per cent, according to one forecast. If we set the peak-to-trough threshold of decline in gross domestic product at 10 per cent, we are heading towards a depression in several countries. Ireland is entering a depression even under the stricter threshold. The number of countries on course for a depression will increase unless the economic upturn dutifully starts in the third quarter this year.
In view of the rapid decline in global trade and growth, one would have expected policymakers to hold incessant meetings to co-ordinate fiscal, monetary and even exchange rate policies, if only to persuade the world that somebody is in charge. Instead, the new US Treasury secretary accuses China of currency manipulation, the US Congress introduces Buy American clauses into the stimulus bill, while in Europe the leaders of France and Germany prove incapable of rekindling a relationship that used to thrive on such crises.
I can understand why people are angry about top bankers who award themselves bonuses financed by taxpayers’ money or who lavishly redecorate their office. But no single group in society, not even credit derivatives dealers, will have caused as much damage to the global economy as the current generation of lethargic global leaders.
If one dates the onset of the present phase of the crisis to the fall of Lehman Brothers in mid-September, policymakers have wasted almost five months during which most of the debate has been focused on the size and shape of domestic stimulus packages. In several countries these do not even begin to kick in until the second half of this year.
The world would have been much better off with a speedier, perhaps smaller and globally co-ordinated package that would have encouraged domestic consumption in China, Japan and the eurozone, with a focus on public sector investments in the US, help for distressed borrowers and a globally co-ordinated programme to restructure the financial sector. Blanket lending guarantees and troubled asset relief programmes turned out to be little more than panic measures. Several hundred billion dollars later the financial sector is still in the same precarious position, as governments are afraid of tackling the industry’s deeper structural problems. I hope the leaks about tomorrow’s much trumpeted US financial rescue package are mostly wrong. If not, it looks as if we continue to throw good money after bad without solving the problem.
The next important global summit, under the auspices of the Group of 20, is not until April. That is another two months in which the world economy can contract. If we are unlucky – and let us face it, this has not exactly been our lucky run – the world economy might be headed first for a depression, at least in terms of global trade, to be followed by a 1990s-style Japanese lost decade.
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