It's a Long Way to Tipperary: the Foreign Economic News
What comes around, goes around. It certainly doesn't stay in Paris...or London, Tokyo or Peking. Long Way to Tipperary is an old WW1 marching song the doughboys sang recognizing how far they had to travel. Both to fight and visiting foreign shores...and different cultures. It turns out that they don't have to go visit this time because our troubles have partly birthed a whole slew of new ones abroad and they will soon be coming to visit. Return of the prodigal downturn, perhaps ? The only "good news" in all this is the schaden - Freudian one that the news from abroad is much worse than here.
Serious indications of worldwide slowdown are showing up in all the major world economies, their inflation problems are much worse than ours and may be increasing. Ours look to be dampening down as the Fed anticipated. A small sliver of silver-lining is that the slowdown is destroying oil and energy demand which is driving base oil prices down and sucking out the speculative component. And with foreign economies weakening the dollar is stabilizing and even strengthening.
After the break you'll find recent news from the UK, the Euro zone and Germany (particularly bad since it was the "engine"), Japan, Italy which is nearing a recession all of a sudden, China, India, Korea and Sinapore. NONE of which is good. You'll also find a report on the intermediate to longish-term oil price outlook from Chatham House in the UK which sees oil returing toward $200/barrel because of significant under-investment in production. Wow, deja vu' all over again.
A major caveat here - you need to read the prior post and this one in conjunction. This one builds up the int'l outlook presuming you've got a good grasp on where we're at domestically and how domestic weakness is at risk from foreign weaknesses and visa versa.
World Economy Readings
IMF dashes Darling's hope for quick recovery The IMF reduced its forecasts for the UK's growth but said the Bank of England had 'little scope' to cut interest rates. Alistair Darling's lingering hopes for a rapid revival in the faltering economy next year were undercut yesterday as the International Monetary Fund reduced its forecasts for Britain's growth and sounded a warning that the country faces two years of economic pain. Yet despite predicting that the UK economy will suffer its weakest two years since the last recession, the IMF cautioned that soaring inflation leaves the Bank of England “little scope” to cut interest rates to shore-up growth. The fund also used its annual economic health check on Britain to warn Mr Darling not to gamble with the nation's finances by using an expected autumn overhaul of the Treasury's fiscal rules to try to borrow his way out of economic trouble. It said that the Treasury was already set next year to breach the rule capping national debt at 40 per cent of GDP as it slides deep into the red. In the latest heavy blow to Mr Darling's optimistic forecasts, the IMF said that a barrage of economic woes would cut UK growth this year to only 1.4 per cent. That was down from the 1.7 per cent it predicted in the spring, and far below the Chancellor's projection for growth of at least 1.75 per cent. Growth next year will be weaker still at a meagre 1.1 per cent, the IMF projected, compared with Mr Darling's present view that it would rebound to at least 2.25 per cent. Britain's housing bust is bringing down the economy, too
Credit Crunch and Weak Employment Conditions Continue to Weigh on Housing Market Midst a steady drumbeat of weak-to-negative economic news out of the Euro-zone in the past few days, there was one report today that gives particular cause for concern – German manufacturing orders. Germany has been the ‘zone’s economic powerhouse in the past few quarters, continuing to see steady-to-strong GDP growth even as demand and output started to weaken, or even outright slide, in France, Italy, and Spain. However, falling demand from the neighbors is starting to take a toll. German manufacturing orders dropped a steeper-than-expected 2.9% s.a. on the month in June and were down 6.1% on the year. One month of weakness may not be so unusual – after all, orders crashed for a month at the start of Q3 2007, then quickly picked up again. But the trend is disconcerting. This was the seventh straight monthly decline, the longest series of declines since German reunification way back in October 1990. Furthermore, it left orders down 4.1% q-o-q in Q2, the sharpest quarterly contraction in sixteen years.
Japan's Government Signals Expansion is Over, Says Economy `Deteriorating' Japan's government said the economy is ``deteriorating,'' acknowledging for the first time that the country's longest postwar expansion has probably ended. ``There is a high possibility the economy has entered a recession,'' Shigeru Sugihara, head of business statistics at the Cabinet Office said in Tokyo today. The government bases its assessment of the economy on the coincident index, its broadest indicator of economic health. Japan's economy expanded at an average annualized pace of about 2.2 percent during the six years of growth that began in February 2002. During the five-year expansion that ended in 1970, the economy grew on average by 11.5 percent. Ibuki said yesterday the economy is at risk of falling into a state of stagflation, a combination of slowing growth and spiraling prices. Yosano said Aug. 4 he plans to announce measures this month to help consumers and companies cope with rising energy costs. Although the economy has yet to contract for two straight quarters -- one definition of a recession -- falling exports and soaring energy and material costs have squeezed profits, compelling companies to cut production, investment and hiring.
Italy's Economy Unexpectedly Shrank in Second Quarter, Nearing Recession Italy's economy unexpectedly shrank in the second quarter, edging it closer to the fourth recession in a decade as households and businesses struggle to cope with more expensive oil. The economy, first of the three biggest in the euro region to report second-quarter growth, contracted 0.3 percent after expanding 0.5 percent in January to March, Istat, the Rome-based statistics office, said today. Economists expected stagnation, according to the median of 22 forecasts in a Bloomberg News survey. From the same period a year earlier, the economy didn't grow at all. European Central Bank President Jean-Claude Trichet yesterday said economic growth will be ``particularly weak'' through the third quarter after policy makers left borrowing costs at 4.25 percent. Italy is a bellwether for the effect record oil prices are having on the region.
Booming China Suddenly Worries That a Slowdown Is Taking Hold Many Chinese have been expecting a post-Olympics economic slowdown, but it has already started and the Games have not even begun. Chinese factories reported a plunge in new orders last month. Exports are barely growing. The real estate market is weakening, with apartment prices sinking in southeastern China, the region hardest hit by economic troubles. The trends, which actually have little to do with the Olympics (the Games themselves, which open Friday, are small compared with the size of the economy), are being felt worldwide. China’s slowing growth is one reason that gasoline prices have fallen in the United States, for example. Similarly, world prices for metals like copper, tin, zinc and aluminum have tumbled in the last several weeks, as voracious Chinese factories have closed, or cut back their consumption. But while China’s difficulties may reduce inflationary pressures around the world, they threaten to slow further the already tenuous global economic growth. “China has slowed down a lot already, but it’s going to slow down more,” said Hong Liang, the senior China economist at Goldman Sachs.Economists expect growth to slip from its recent pace of 11 percent or more annually to as low as 9 or 9.5 percent over the coming year. China Indicator Graphic: A Slowdown in China
- The Slowdown in China (Calculated Risk on Long-Beach container traffic)
Can India Ever Catch Up With China? From the gleaming new airport terminal to the wide-open three-lane highways which sweep through a city of fantastical glass sky-scrapers and clean streets filled with modern shops and authentic restaurants of all kinds the contrast for someone arriving from New Delhi is actually pretty humbling. A more legitimate question might be to ask how Delhi twenty years hence will compare to the Beijing of today, and it's at that point that the widespread belief among Indians that it is destined for ‘superpower' status start to look questionable at best. How can India, with all its messy democratic politics, compete with China when it comes to regenerating its dirty and decrepit cities, of which New Delhi is a perfect example? Indians frequently cite their democratic traditions as the ultimate reason why they will overtake China in the long-run, but to look at the limited achievements of the one-time reformer Manmohan Singh these past four years might lead you to the opposite conclusion. I find it increasingly difficult to see how will India get the job done. In a democratic country, particularly one where the poor create the vote-banks of power, even getting started on the job of urban regeneration is difficult, just ask the town planners in Mumbai. Whether it's building power stations - look at Mumbai's travails this summer, with some industries only having power four days a week - or roads, the main road connecting Delhi with its airport looks like it was made by a child compared to Beijing's superhighways, India comes up way short of China time and again.I'm not glossing over China's often brutal attitudes to its citizens' rights when it comes to urban regeneration - particularly for these Olympics - but they are getting the job done, which in the end will materially improve lives. The shocking figures from Unicef over child-mortality in India are yet another reminder of the extent to which a corrupt and inefficient bureaucracy is failing to invest in the people who, in the long term, must be made healthy and productive if India really wants to compete with China.
Bank of Korea Unexpectedly Raises Interest Rate to 5.25% to Curb Inflation The Bank of Korea unexpectedly raised its benchmark interest rate to an eight-year high of 5.25 percent, saying the fastest inflation in a decade poses a greater threat than slowing economic growth. Consumer prices climbed 5.9 percent in July from a year earlier, overshooting the central bank's target for the ninth straight month. The bank aims to keep inflation between 2.5 percent and 3.5 percent, on average, for the three years to 2009. ``Inflation will likely remain quite high in the coming months,'' Governor Lee told reporters today. He said inflation probably will exceed the bank's forecast of 5.2 percent in the second half of the year. The government said earlier today the economy is weakening as consumer spending slows. ``We need to place priority in stabilizing ordinary people's lives and creating more jobs,'' the finance ministry said in its monthly report. Households were at their most pessimistic in almost four years in June and manufacturers' confidence for August sank to the lowest in three years. Factory output increased 6.7 percent in June from a year earlier, the smallest gain in nine months. Adding to the central bank's concerns, the won's 8 percent decline against the dollar this year has made imported goods more expensive and exacerbated inflation pressures. Import prices surged 49 percent in June from a year ago, the biggest gain in more than 10 years.
Singapore Cuts 2008 Growth Forecast on U.S. Slowdown, Expects `Bumpy Year' Singapore lowered its 2008 growth forecast for a second time this year as Prime Minister Lee Hsien Loong warned of a ``bumpy year ahead,'' saying a U.S. slowdown will hurt the global economy. The Southeast Asian economy will grow between 4 percent and 5 percent in 2008, Lee said in a televised National Day message today. The government had earlier estimated an expansion of as much as 6 percent this year, after growth of 7.7 percent in 2007. Asian manufacturers face declining demand as a housing recession and financial turmoil slow expansion in the U.S., the region's largest overseas market. Accelerating inflation and higher fuel costs have also left consumers around the world with less to spend on music players and digital cameras. ``U.S. consumers are spending less, and that is affecting the whole global economy,'' Lee said. ``The difficulties will probably drag on well into next year before getting better.''
Supply crunch may bring $200 oil in 5-10 yrs: study The world faces a serious oil supply crunch within five to 10 years that may drive prices up to more than $200 a barrel, a British think tank said on Friday. The Chatham House report says $200 oil is possible, barring a collapse in demand, because of inadequate investment by oil companies in raising output -- not because of a lack of oil underground. A supply crunch appears likely around 2013, "even allowing for some increase in capacity over the next few years," says the report by Paul Stevens, a senior research fellow at Chatham House. The report concedes that it uses a "controversial and extremely bullish" forecast of future oil demand and supply. It assumes Saudi production capacity will remain flat after reaching 12.5 million barrels per day in 2009 and that the capacity of other OPEC countries remains flat after 2008. Oil prices have risen sharply in the last few years, with U.S. crude shooting to a record of more than $147 a barrel in July before easing back to around $120 now. The report said investment in new oil supplies has been and will be inadequate, partly because international oil companies have incentives to return dividends to shareholders rather than reinvest them. It also cited "resource nationalism" in some producer countries that exclude international oil companies from helping develop production capacity. It also noted that some governments limit investment in their national oil companies. The report noted that governments in industrialized countries have been reluctant to intervene in energy markets. It said markets alone could not provide sufficient incentives for conservation or to bring more energy on-stream, and that a price spike might break down opposition to intervention.