Japan’s exports fell by a record 49.4 percent in February as deepening recessions in the U.S. and Europe, and a sharp slowdown in China hit demand for Japanese products around the globe. Shipments to the U.S., still Japan’s biggest market, dropped an unprecedented 58.4 percent from a year earlier. Car exports were down 70.9 percent. This follows January’s year on year drop of 45.7%.

February’s drop in exports was the greatest since at least 1980, when the government started to keep comparable data.

Japan’s ageing population and workforce has lead it to become increasingly reliant on exports for GDP growth, as consumer demand stagnates internally. Japan is thus especially sensitive to changes in world trade patterns, and with the World Trade Organization forecasting trade will shrink 9 percent this year (the most since World War II) Japan looks especially vulnerable. During Japan’s expansion of 2002 to 2007, exports rose as a portion of GDP to 15.6 percent from 10.4 percent.

And it isn’t only Japan which will be affected by this, since imports were down by 43%, and of course China is quite dependent on exports it sends to Japan. Continue reading →

News from Russia’s crisis stricken economy has certainly been a lot less dramatic of late, but even as Finance Minister Alexei Kudrin seeks to reassure us that everything is coming back under control and that lending in the Russian economy is “in full swing” once more, doubts remain. Are we simply seeing the temporary impact of all those stimulus measures that have been put into place, or is a more general recovery possible at this point?

Certainly if we come to look at the purchasing managers indexes we can see that things were better in February than in January. The VTB services index rose to 40 in February from 36.8 in January, although since any reading under 50 indicates contraction, it is clear that Russia’s services industries are still shrinking at a pretty hefty rate.

The manufacturing PMI also improved slightly, rising to 40,6 from January’s record low of 34.4.

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According to a study out today by Capital Economics, East Europe’s gross domestic product will shrink by 6 percent on average this year, with every single economy in the region posting a contraction.

The biggest declines (15 percent) will be in Latvia and Lithuania. Poland is forecast to contract by 3 percent. The Polish decline will be lead by a drop in industrial output that will help push the unemployment rate to close to 15 percent. Falling tax receipts will widen the fiscal gap to 5 percent of GDP, making the goal of euro adoption in 2012 unlikely.

Hungary and Romania, which is negotiating external aid, will both shrink by 7.5 percent. Turkey will also shrink 7.5 percent, while Ukraine’s and Estonia’s output will decline by 10 percent. Bulgaria, expected to shrink 5 percent this year, is likely to follow its neighbor Romania in applying for an IMF loan as a collapse of exports and inward investment will shrink the money supply, forcing the government to drain its fiscal reserves to restore liquidity. Capital Economics argue Bulgaria’s reserves will only cover their needs for a further six to twelve months. Continue reading →

Well, following the OECD forecast last week (German GDP to drop 5.1 percent 2009, compared to a decline of 4.1 percent in the euro region), German bank analysts and research institutes are now cutting their forecasts. Perhaps the most radical at this point is Joerg Kraemer, chief economist at Commerzbank in Frankfurt, who is predicting German gross domestic product will drop as much as 7 percent in 2009. He was previously forecasting a drop of between 3 percent and 4 percent. The institutes are also coming into line, and RWI institute have now said they expect the economy to shrink 4.3 percent instead of the 2 percent projected in December, while the IMK institute has cut its forecast to a contraction of 5 percent from an earlier1.8 percent one.

You can find my last substantial review of the German economy here. Personally, I now think a 5% contraction is a done deal, and while I am not at this point prepared to go as far as Joerg Kraemer, there is plenty of downside risk, and we should now at least be prepared to contemplate the possibility that the second half of this year will be worse than the first half, as the impact of the stimulus plan fades, inventories are cut back, and deep job cuts start to hit the manufacturing sector. It is also rather worrying that, with elections looming, Germany’s leaders seem to be in serious denial on all of this.

This from Bloomberg this morning:

Japanese residential land prices fell to a 24-year low as job losses and wage cuts discouraged homebuyers, while tighter credit markets choked off funding for property developers.

Residential land prices fell 3.2 percent in 2008 to the lowest since 1984 and average commercial land prices dropped 4.7 percent to a three-year low, the Ministry of Land, Infrastructure, Transport and Tourism said today in a report. Overall property prices declined 3.5 percent, erasing two years of gains that followed a 15-year slump.

The decline in residential land values, which are about half of what they were at the height of Japan’s bubble economy in 1991, may continue as the recession deepens. The central bank forecasts the sharpest economic contraction in more than 60 years as an unprecedented decline in exports forces companies to cut production and fire workers.

Land prices have, of course, lain at the heart of the ongoing Japanese deflation problem. Do people still think they know what all those toxic assets lying about out there are actually worth? I mean, Japanese land values are just about to go below prices established more or less 25 years ago. So in property market terms at least, it isn’t the lost decade anymore, we’re moving in to the “lost quarter century”.

There is one hell of a rumpus going on at the moment, in particular about the recent statements made by the German politician Otto Bernhardt, a leading member of Angela Merkel’s Christian Democrat party, in a Reuters interview last Thursday. There is also a hell of a rumpus going on in the United States about the Geithner Bailout. My point here is simple, one and the same issues are involved in both cases, although in the latter we are talking about banks, while in the former we are talking about entire countries.

Part of the issue is moral hazard. What both the US Treasury and the EU Commission/ECB seem to be doing at the moment is bailing people out without recourse, and this is dangerous at the best of times, but when it simply won’t work (which I’m sure of in Europe, and Krugman estimates in the US) then it almost amounts to recklessness. The core of the present policy seems to have been enunciated by the hapless Otto Bernhardt in his unfortunate Reuters interview:

“There is a plan.” He added: “The finance ministers have agreed the procedures. The core point is: ‘We won’t let anyone go bust’.”

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European Monetary Affairs Commissioner Joaquín Almunia recently, and possibly totally inadvertently, stumbled on a very interesting argument. Here it is:

“Who is crazy enough to leave the euro area? Nobody,” Almunia said. “The number of candidates to join the euro area increases. The number of candidates to leave the euro area is zero.”

Reductio Ad Absurdum

Now you don’t need a PhD in economics to understand what follows, although a little bit of basic logic would help. What we have here could be construed as a kind of syllogism (and from now on let’s christen this one “The Almunia Syllogism”). The Almunia Syllogism has the following form:

a) Anyone leaving (or aiding and abetting the departure of someone from) the Eurozone is crazy
b) The EU Commission, The ECB and The National Leaders are not crazy
c) Therefore no one will leave, or be allowed to leave, the eurozone (at least under current conditions)

Q.E.D. We Will Have A United States Of Europe.

Well, ok, I do need to add a lettle lemma here to the effect that the only way to enforce (c) is to build the necessary architecture, and there is room for debate about this, since this lemma is neither proven, nor is it self evident. You also need to accept that there is an excluded middle here, and we do not have a “now either the EU leaders are crazy ot they aren’t” fork which we can get diverted down.

As I say, the lemma is not self evident, although my own opinion is that in the weeks and months to come its validity will become extraordinarily clear even to the most reticent among us, but this still needs to be established. The thing about the lemma is that it focuses the debate. Those who do not agree with it need to be able to show how we can have (c) within the present architecture (since here there is a middle to exclude, either we can or we can’t). The results coming out from the “we can” camp are not entirely encouraging. For example, ECB Executive Board member Lorenzo Bini Smaghi’s recent attempt to argue that Krugman has it wrong, and that (we can manage with what we have) fails stupendously to convince, in my opinion, and especially the extract I reproduce below (which exemplifies precisely the point those who want new achitecture are making).

For instance, for the period 2009-10, discretionary measures adopted in Germany total 3.5% of GDP, compared with 3.8%in the United States. In some European countries, such as Italy, the size of such stimulus measures is relatively limited owing to the high levels of debt, but in other countries the total fiscal stimulus is larger than in the United States.

The whole issue is that we need a mechanism to average out the stimulus, is that so hard to understand? Is this obscurantism, or simply stupidity?

A Literary Trope Not A Syllogism

On the other hand, the formal validity of the following “utterance” from Almunia is rather more questionable.

“Don’t fear for this moment,” he said. “We are equipped intellectually, politically and economically to face this crisis scenario. But by definition these kinds of things should not be explained in public.”

The first phrase is an exhortation, one which I would agree with (but not for the same reasons), the second is an assertion whose truth content is, at least,questionable, while the third is an admission, one which would perhaps better not have been made, or a piece of advice, which the unfortunate Otto Bernhardt seems never to have received.

A senior German lawmaker said euro zone states stood ready to come to the aid of financially fragile members of the currency bloc, sparking furious denials from European leaders that a specific rescue plan existed. Otto Bernhardt, a leading lawmaker in Angela Merkel’s Christian Democrats (CDU), told Reuters in an interview late on Thursday: “There is a plan.”

and then Bloomberg let us know a bit more about the details of the plan.

The German Finance Ministry has no knowledge of a rescue fund organized by the European Central Bank for troubled euro-region members such as Ireland and Greece, spokeswoman Jeanette Schwamberger said.

Otto Bernhardt, finance spokesman for Chancellor Angela Merkel’s Christian Democratic Union, said in an interview with Reuters today that the ECB has a fund at its disposal to help troubled countries and can make money available at 24 hours’ notice.

Hungary’s Prime Minister, Ferenc Gyurcsany, announced this morning (Saturday) his intention to resign as Prime Minister. Gyurcsany informed a congress of the Socialist Party of his decision following a sharp fall in the popularity of his government.

Gyurcsany will now inform the Hungarian Parliament of his decision (probably on Monday), and attempt to initiate a “constructive” no confidence vote, by which means it is hoped that a new candidate for PM will emerge. Early elections are currently thought to be unlikely, although it is not clear at this point how the minority coalition partners will react.

Well, we now have a clear pattern being established following the recent IMF interventions in Iceland, Latvia, Hungary etc – the government collapses under the weight of the measures. Basically, and as I said during the week, what we have unfolding before us in Hungary is a tragedy, since the rigid enforcement of the deficit ceiling without external fiscal injections from the EU, simply means that the economic contraction feeds upon itself.

I hear that I am the obstacle to the co-operation required for changes, for a stable governing majority and the responsible behaviour of the opposition,” he was quoted as saying on Saturday by Reuters news agency. “I hope it is this way, that it is only me that is the obstacle, because if so, then I am eliminating this obstacle now. “I propose that we form a new government under a new prime minister.”

Irrespective of whether or not Gyurcsany was part of the problem rather than part of the solution, and despite the fact that Hungary may benefit from having a new leader, the issue is a much bigger one than the office of Prime Minister.

Amongst other matters, this is the principle “bottleneck”:

The source said talks with parliamentary parties would start next week to pick a new premier as soon as possible to pass much-needed budget measures with a stable majority.

According to this Reuters report, the Slovenian Minister of European Affairs and Development Mitja Gaspari informed a news conference in Ljubljana yesterday (Thursday) that the latest OECD 2009 forecast for the eurozone is for a contraction of 4.1 percent. He also stated that the OECD figures show Germany’s economy will contract by 5.1 percent and Italy’s by 4.2 percent. While these figures are completely unofficial – official publication of the updated OECD forecast is due on March 31 – they do not seem at all unreasonable, although they are of course shocking. At think at this stage talk of a recovery in the second half of the year is completely premature, and the only real issue is whether 2010 will simply be more of the same, or will be a bit better (a eurozone contraction of say 2%).

The previous OECD forecast, issued on November 25, showed euro zone 2009 GDP down 0.6 percent, Germany down 0.8 percent and Italy down 1 percent. I think the current numbers are now in the right order of magnitude, and the debate will obviously be about what to expect for next year.

The IMF yesterday published an “update” eurozone forecast of a 3.2% 2009 contraction, but also reported it was still “working on its projections”.

Advanced economies will suffer deep recessions in 2009, the assessment said. Leading economies in the Group of Seven are expected to experience the sharpest contraction for these countries as a group in the post-war period by a significant margin (see table). The IMF said that in the fourth quarter of 2008 global GDP contracted by 5 percent at an annualized rate. The IMF is still working on its projections and will announce numbers for countries around the world on April 22.