Things are not just going to get better and troubles go away. All over the world a crisis looms.
TELEGRAPH Business News 15.5.08
OECD warning as stagflation goes global
By Ambrose Evans-Pritchard, International Business Editor
The OECD's early warning signal is flashing clear signs of economic weakness across the world, with mounting evidence that China, India, and Brazil may soon succumb to the downturn.
The closely-watched gauge -- known as the Composite Leading Indicators (CLI) -- has picked up a sharp deterioration in the eurozone in March, notably in Italy and France where the advance signals are falling even faster than in Britain. The measure tends to anticipate the industrial cycle by about six months.
While growth continues to power ahead in most emerging markets, rampant inflation is starting to damage business confidence. "The latest data point to a potential downturn in Brazil, China, and India," said the OECD, the club of rich nations.
Russia is the only country still in full boom among the so-called BRIC quartet of rising powers, but the country's inflation rate reached 14.3pc in April as oil and gas wealth the flooded the economy.
Price pressures across the emerging world are reaching levels that may soon threaten stability unless governments jam on the brakes. Inflation rates have reached: Venezuela (22pc), Vietnam (21pc), Latvia (18pc), Qatar (17pc), Pakistan (17pc), Egypt (16pc) Bulgaria (15pc), The Emirates (11pc), Estonia (11pc), Turkey (9.7), Indonesia (9pc) Saudi Arabia (9.6pc), Argentina (8.9pc), Romania (8.6pc), China (8.5pc), Philippines (8.3pc), India (7.6pc).
Many of these countries are now suffering the worst prices spiral in thirty years, setting off widespread riots. India's government has suspended futures for a clutch of key commodities as states resort to draconian measures.
While the soaring cost of food and energy is the key driver for the poorest countries, others are ensnared by their own currency pegs. Most Gulf states are linked to the dollar, forcing them to shadow the US Federal Reserve's super-loose interest rate policy, with inevitable over-heating. China operates a semi-fixed rate, or 'dirty float'.
Christian Noyer, governor of the Bank of France, said this week that the pegs had become a major headache. "The world environment has become very inflationary. Many emerging economies are partially 'importing' US monetary policy, although their position in the economic cycle is fundamentally different," he said.
Stock markets have already fallen sharply in China, India, and Vietnam as the authorities rein in credit. Morgan Stanley has advised clients to cut their holdings of emerging market stocks, warning that surging prices have started to queer the pitch -- at least in the "near term".
Europe faces an incipient "stagflation" as inflation of 3.3pc combines in a nasty cocktail with slowing growth. The mix poses an acute dilemma for the European Central Bank. It fears that 1970s-style inflation could become lodged in the system as workers push for higher wage deals.
Jean-Claude Trichet, the ECB's president, warned of a return to "mass unemployment" if Europe repeats the errors of first oil shock. "We would make an enormous mistake, which is precisely the mistake we made in the first oil shock. We are calling on all economic agents, whether corporate or social partners, to be as responsible as possible," he said.
The ECB's task is doubly complicated by the yawning gulf between the Germanic and Latin blocs of the eurozone. Industrial output fell in Italy, France, and Spain in March. April manufacturing orders fell at the fastest rate since the dotcom bust in Italy and Spain. "We're suffering a clear and profound slowdown in the Spanish economy", said Pedro Solbes, the country's finance minister.
The issue of Spain's crumbling property market intruded on the bank's policy agenda last week, pitting the South against the hawkish Bundesbank chief Axel Weber.
It is understood that the meeting broke down into a fierce exchange of national views, ignoring the EU treaty requirement that the ECB focus on the eurozone as a whole. EU officials have begun to ask whether Mr Weber is committed to monetary union. A senior German advisor told a closed group of investors in London last week that "it wouldn't matter in the least if Spain left the euro".
David Bloom, currency chief at HSBC, said the single currency was likely to fall from near record highs as investors woke up to the realities in the South.
"The euro has been trading on the German export story. The market has conveniently ignored the collapse in Spain, and the near recession in Italy," he said.
Critics say the ECB has been fretting too much about inflation and not enough about the risk of a severe slowdown later this year and into 2009 if monetary policy is kept too tight. The bank has held rates at 4pc since the credit crisis began, even though its own credit survey points to a lending squeeze.
Three-month Euribor rates -- which set many financial contracts --- are still at distress levels of 4.85pc, roughly 60 basis points above par. ECB officials say their rigid mandate does not allow them to look beyond the current energy spike and follow the Fed in cutting rates pre-emptively.
The risk is that the ECB's over-reacts to the oil spike, setting off debt deflation down the road.
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The global slump of 2008-09 has begun as poison spreads
By Ambrose Evans-Pritchard, International Business Editor
The avalanche of bankruptcies has begun. Six US companies of substance have defaulted on bonds over the past fortnight, against 17 for the whole of last year.
As a "non-believer" in the instant rebound story, I am not easily shocked by gloomy reports. But the latest note by Standard & Poor's - “The Bust After The Boom” - gave me a fright.
The sick list is varied, though most for now are victims of the housing crash: Linens 'n Things, ($650m), Kimball Hill ($703m), Home Interiors ($310m), French Lick Resorts ($142m), Recycled Paper Greetings ($187m), and Tropicana Entertainment ($2.49bn).
As the Fed's latest loan survey makes clear, lenders have dropped the guillotine. With the usual delay, the poison is spreading from banks to the real world.
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“Nowhere and nothing will be immune. We are on the cusp of an equity meltdown that will slash and shred portfolios," said Albert Edward, SG's global strategist.
"We see a global recession unfolding. Liquidity will drain away and crush the twin emerging market and commodity bubbles. The recent hope that 'the worst might be over' is truly staggering. Profits are disintegrating," he said.
Today's "bear rally" may live on into June. Don't count on it. Global bourses are no longer rising hand-in-hand with oil in exuberant celebration of liquidity relief (US, UK, and Canadian rate cuts).
Crude ceased to be a friend of equities when it reached around $110 a barrel. At last week's close of $126, it became an outright threat. The Bush rescue package - $800 in rebate cheques per household - has been rendered null and void by the latest spike. The average US home is now spending over 8pc of income on energy or fuel.
OPEC is playing with fire by refusing to pump more oil to offset rebel attacks in Nigeria. The cartel's output drop of 350,000 barrels a day in April is a hostile act at this point.
But there again, why should Middle Eastern states help America as long as the White House keeps filling the US petroleum reserve to prepare for war with Iran? Bush is playing with fire, too.
The oil spike will burn itself out. China has hit the buffers. With inflation at 8.5pc, it risks political turmoil. Moreover, it has repeated Japan's mistakes in the 1980s, building too many factories shipping too many goods at slender margins into a crumbling export market.
Lehman Brothers' Sun Mingchun says China will tip over in the second half of this year. "With so much latent overcapacity, an export-led slowdown could trigger a chain reaction which, in the worst case, could threaten the stability of [its] financial and economic system," he said.
Britain, Europe, Japan, and China will go down before America comes back up. This is turning into a synchronised bust, after all. The Global Slump of 2008-09 is under way