The worst is not; So long as we can say, "This is the worst." (William Shakespeare)
It is said that today is pregnant with tomorrow. What and how we have done things in the past has shaped out today and what and how we do things today determine the shape of our future. To see into the future of our economies, with some small degree of certainty, we have to pay attention to what is happening around us and what we do.
But to get an idea of how the future will be, one has to have a real picture of the present. This is important since a false picture will present us with false alternatives, on which we act which in turn will result in unexpected outcomes (i.e., future that we are not prepared for).
It is not always easy to see through all the false pictures and data that we are constantly presented with. For example, in Norway on February 18th, the real-estate association came out with the statement that the housing crisis was almost over and the bottom was reached. This was plastered all over the place. Next day on February 19 th, the Norwegian Centre for Statistics came out with its own forecast; stating that house prices will continue to fall for the next year and that situation will deteriorate further.
It was clear to some of us that the real-estate association was putting out false information to drum-up business for its members. But if banks, industrialists, and even politicians also send out false and misleading information, then the average person will make decisions that may be contrary to his or her best interests.
Most of us do not have the time, energy, or even the necessary knowledge to gather and sift through large amount of data. We rely on news media, and the experts to make most of our decisions. Until last year, very few people were talking about the tremendous crisis that was well under way; even though as early as 2006, there were clear signs that the economy was under tremendous pressure.In this article I will try to provide you with a picture of the present situation and then try to extrapolate based on the current policies adopted by various governments, what the near future will look like.
The current economic situationLet me tell you in no uncertain terms that we are facing a synchronised global economic depression and I am not the only one that is saying this. In early February, the International Monetary Fund’s chief Dominique Strauss-Kahn said the world's advanced economies -- the U.S., Western Europe and Japan -- are "already in depression”. Gordon Brown, the UK’s Prime Minister also used the word "depression" to describe the global economy, although his aides quickly said it was a slip of the tongue.
The politicians and others of course avoid using the term “depression” for fear of creating a panic; instead they use terms such as “severe recession” or “one of the most serious financial crises since the great depression”, etc. But they all are saying the same thing, we are in a depression and all the available data support this. An important fact to remember is that this depression is synchronised and this synchronicity has been made possible by the globalization and accompanying deregulation; the very things that were making workers poorer and the rich, richer.
The misery list includes most of the Eastern European countries as well with some such as Ukraine set to experience severe contraction. According to IMF Ukraine’s GDP will shrink by 8 to 10% in 2009. The Russian economic growth is also set to fall. According to the Russian Deputy Economic Development Minister Andrei Klepach the forecast for the Russian economy has worsened to a 2.2-percent contraction in GDP.Japan’s economy, the second largest in the world, contracted by 12.7 per cent on a seasonally adjusted annualised basis in the fourth quarter and is set to contract by. According to the Taiwanese government, Taiwan’s GDP will shrink by 3% in 2009. Another big economy in Asia is Korea. According to S&P sovereign ratings, Asia's fourth-largest economy will contract by about 3.5 percent this year. All other South East Asian economies are reporting severe slow down or outright contraction except China.
According to National Bureau of Statistics of China, by comparing the fourth quarter 2007 to that of the fourth quarter 2008, China had achieved a 6.8 percent growth in 2008. However, many believe that this figure is misleading and that the Chinese are hiding the extent of the economic contraction of its economy. They point out that energy consumption in China has substantially been reduced. This could not have happened without a marked slowing down of the economy.According to the article published in The Epoch Times (17 Feb 09) “Economists at the Standard Chartered Bank estimate China’s growth rate to be around 1 percent. Morgan Stanley analysts estimate it to be at 1.5 percent. This is much lower than the CCP reported 15 percent for the first quarter of 2007. According to economists at Merrill Lynch, the sequential growth rate of fourth quarter of 2008 was zero percent.”
Middle Eastern countries have also been severely affected by the financial crisis. The revenue from their major source of income, oil, has fallen at an incredible rate. Oil prices that were around 120 to 140 dollars last year have come down to around 30 to 40 dollars this year. Every country has slashed its expenditure with the accompanying slowing growth. For example recently UAE was forced to halt construction projects worth $582 billion or fully 45% of all projects. A recent report in New York Times (11th Feb. 09) paints a grim picture of the situation in Dubai. The report states that ” with Dubai’s economy in free fall, newspapers have reported that more than 3,000 cars sit abandoned in the parking lot at the Dubai Airport, left by fleeing, debt-ridden foreigners (who could in fact be imprisoned if they failed to pay their bills)”. Iranians, Saudis, Iraqis, Kuwaitis and others have also been forced to slow down or freeze many projects. One must not forget that many of these countries’ petro-dollars are re-circulated back into the US and European economies. Those funds are drying-up fast.Turkey sitting between the Europe and Middle East is also suffering. Turkey has the largest GDP in the Islamic world. Turkey's GDP was 750 billion in 2008, the GDP of Saudi Arabia was 600 billion dollar for the same period. A once dynamic economy is now negotiating with IMF for help.
Having surveyed most of the economic landscape of Europe and Asia, we can now look at the world largest economy, the US. The US economy is in a terrible shape, with all sectors going through severe depression. Housing market has completely collapsed. The auto industry is going bankrupt. The banking sector is alive only by the grace of the government handouts. The entertainment industry (TV and film industry excluded) is facing severe problems and unemployment is increasing rapidly. The Federal Reserves’ forecast for 2009 shows a contraction of 0.5 to 1.3 percent of the GDP with official unemployment rising to 8.5 or 8.8 percent. Here one should note that this official unemployment rate does not present a true picture, since all those who give-up registering with the unemployment office or are barely working (part-time workers, etc) are not counted as unemployed.The missing engine of growth
Before we look at the future development we have to remember that there are four factors that power an economy: consumers, investors, government, and a favourable trade balance. Some economies such as China rely on favourable trade balance and Foreign Direct Investment (FDI) for their growth. For example according to the Chinese Ministry of Commerce, from 1990 to 2007, China received $748.4 billion in FDI. At the same time, since its economic liberalization, China has recorded consistent trade surpluses with the world. For example China has registered trade surpluses of $102 billion for 2005, $177.47 billion for 2006, $262.2 billion for 2007, and $295.47 billion for 2008. China currently has accumulated nearly two trillion dollars in foreign exchange reserves.
If we just look at the differences in consumption levels between US and China-India, we’ll see that these countries are not in a position or have the financial resources to pick-up the slack left by the US consumers. Anyway, China’s growth is based on its exports and the FDI and not its consumers. When the international market shrinks, the Chinese will see (as they do now) a sharp drop in their actual growth. If they try hard they may be able to keep their people’s standard of living at its current level (highly unlikely); but they will be unable to increase consumption. Anyway, according to the Bloomberg (19 January 09), the Chinese unemployment rate has jumped to its 30 year high and will most likely increase further.How about Japan? Japan also started its economic miracle by export-led growth. Japan saved hard, and worked hard to become one of the largest economies in the world. However, the bursting of the housing bubble of 1990-91 started a deflationary period that Japan never really recovered from.
If we look at the Consumer Price Indexes (CPI) for Japan, the U.S., and the Euro Area from 1999 to 2006, with 1999 being the base (100), we’ll see that by 2006, the CPI index for US was 122.8, 118.5 for EU and 97.7 for Japan. This shows that until 2006 Japan was still in the grip of deflation.Add to this the recent financial crisis and you’ll see that Japan is once again entering another deflationary period. In deflationary periods, consumers spend less and try to save more. The fear of losing one’s job, the psychology of ever decreasing prices, and general feeling of doom act against free spending by the consumers. One should also understand that Japanese consumers are reluctant to spend like their American counterparts. According to the available figures (2005), the Japanese consumption was only 55% of the GDP. Compare this to the American consumption of 77%. So the Japanese consumers cannot help either.
What about the EU? Euro zone consumers have a slightly better consumption rate than the Japanese. The consumption rate for Euro zone (2005) was 57% of the GDP. In addition the Euro zone is facing severe financial problems with many countries such as Spain, Ireland, Italy and others facing mounting debt and shrinking export market. Consumers already hit by the housing crisis, financial crisis and now the imminent unemployment crisis cannot be expected to start spending wildly.