from the hip

Denmark has been hit very hard by the international recession. Private consumption has dropped rapidly. Car sales are hit especially hard. The Danish newspaper Politiken writes:

Car sales are generally a good indicator of whether people are hanging on to their money; In the fourth quarter of 2008 car sales dropped no less than 23.8 percent. Other goods dropped 1.1 percent.
The new figures come the day after new unemployment figures showed an increase for the fourth month in a row. January jobless figures showed an increase of 5,000 with unemployment now at 2.3 percent.

The Danish GDP for the year 2008 as a whole is negative. And, as yet, there a few signs that the drop in the Danish economy is declining.

Danish newspaper Politiken reports that Danish car sales have dropped dramatically:

Private and business car sales in November 2008 were halved compared to the same month in 2007, according to the latest report from Statistics Denmark.
Businesses purchased some 3,600 vehicles in November 2008 – 2,200 fewer than in the same month last year. Private purchases also dropped dramatically – from 9,300 vehicles last November to 4,700 cars this year.
The biggest drop has been in vans and heavy vehicles. Sales of vans of between 3 and 3.5 tonnes have dropped by 60 percent compared with November last year.

It is hard to interpret this as caused by anything else than the financial crisis.

First we learned that the recession was deeper in the US than had previously been told. Now we learn the same about the UK. It is somewhat strange that the bias of these numbers seem to consistently be in the same direction?

Anyway, here is what Times writes about this issue today:

OFFICIAL figures this week will confirm that the economy has been sliding into recession for months and could show that the downturn is deeper and started earlier than first thought.

Revised figures for gross domestic product (GDP) in the third quarter are set to show a fall of at least 0.5%. Several analysts believe that subsequent information, particularly on the dire performance of manufacturing, will see a sharper quarterly fall of 0.6%.

Whitehall officials are also braced for a revision of earlier data, which could change the timing of the recession.

Economists are getting gloomier about the outlook. The Centre for Economics and Business Research, a consultancy, predicts that Britain will contract by 3% in 2009 and a further 0.7% in 2010, implying a long, deep recession.

Capital Economics, another consultancy, now predicts a fall of 2.5% in GDP next year, with a further drop of 1% during 2010.

This compares with the Treasury’s prediction of a decline in GDP of between 0.7% and 1.25% next year, followed by a recovery in 2010, when it expects to see the economy grow by between 1.5% and 2%.

As you can see, the new figures, as well as the updated outlooks, point in the direction of a recession that is both deeper and of longer duration than has so far been indicated by official sources.

While the economic downswing is still making itself felt in the US, it is now also hitting several European countries hard. And inflation is soaring, and hit a record high of 4.1 percent last month.

“There’s no obvious trigger for strong economic growth in Europe until the end of 2009,” says David Owen, chief European economist at Dresdner Kleinwort in London. “Massive [financial] imbalances need to be worked out, and the corporate sectors in many countries remain in a substantial deficit.”

Consumer confidence for the euro area has fallen to negative 29.7, the lowest it has been since 1993. And the news about the plunge in factory orders in Germany, led to the following comment, reported in the New York Times:

“It now looks likely that the euro zone will be the first major economy to fall into recession,” Jonathan Loynes, the chief European economist for Capital Economics, wrote after the report of sagging orders in Germany.

Great Britain

Royal Bank of Scotland, Britain’s second-largest bank, recently posted its first loss in 40 years after taking a £5.9bn hit from the credit crunch. And Barclays, the third-biggest bank, took a fresh £2.8bn write-down. Also, the price of houses are dropping rapidly, according to Guardian

the Halifax said house prices last month were 11% down on a year earlier – the first double-digit decline since its monthly healthcheck of the market was first published 25 years ago.

House prices back to 2006 and still falling, says Times. And new housing orders are down 33%. And, of course, home repossessions surge.

Business groups and City analysts warned that deep and rapid cuts in the cost of borrowing would be needed next year to pull Britain out of its first recession in more than 15 years. House prices are falling more rapidly than they were in the property crash of the late 1980s and early 1990s

It would seem a possible recovery in Britain will not be aided by increased consumer spending in the short term!

Recession in Germany?

Spiegel online writes that the German economy may have shrunk in the second quarter, according to early reports, and that the outlook for industrial production isn’t lively. Germany could slide into recession, and the German economy may have shrunk by around one percent. They also note that:

German factory orders were down by 2.9 percent in June from May, and orders from abroad for German goods plunged by 5.1 percent. Production at German factories rose by 0.2 percent in June — less than expected

Spain in deep trouble

Portugal, Italy, Greece, and Spain all face severe challenges. In Spain, the imploding domestic housing market has pushed the unemployment rate to 10.7 percent. The number of bankruptcies in the building sector is exploding, and one third of the job losses stems from the construction sector. As well, the housing market is stalling. The inflation is about 5 per cent.

The US

The credit cruch is still being felt, and so is the reversal of the wealth effect and high oil prices. In addition to bad news from the banking sector, Fannie Mae, Freddie Mac, Indy Mac, and so, in the latest sign of the deepening troubles, G.M. recently reported a second-quarter loss of $15.5 billionfollowing a loss of $8.7 billion reported earlier by Ford. Car sales are dropping, especially sales of American cars.

Guardian notes that:

The US mortgage finance empire Freddie Mac yesterday predicted the worst housing slump since the Great Depression as it set aside $2.5bn (£1.28bn) to cover credit liabilities caused by delinquent loans and foreclosures.

And in New York Times, Peter S. Goodman recently wrote (August 1) that “More Arrows Seen Pointing to a Recession”.

Overall

Pretty gloomy still. The most positive piece of news is the slight drop in oil prices. But still serious signals of a slowdown of growth and possibly recession both in Europe and the US.

I am frequently surprised by the ability of American media to explain away or minimize the role of domestic factors in the current recession in the US. Washington Post provide the most recent example of this kind of foolishness. Today it featured the following headline:

Exports Not Hurt by Euro’s Strength, Official Says

BRUSSELS, April 15 — Most European exporters are not yet feeling the pain of the strong euro, a European Union official said Tuesday — even as aircraft maker Airbus, which sells its planes in U.S. dollars, called the level “unbearable.”

Now, if the euro was strong, this would be ok. However, if it is the dollar that is weak, then businesses in the EU don’t really have any big problems. Then it is only sales in the US that are affected.

From a business point of view it matters a lot whether it is the dollar that is weak or the euro that is strong – it is only for trade between those two areas that it does not matter which is what. But for all other trade – and an increasing proportion of world trade falls in that category – it matters.

And really, the Euro has strengthened somewhat versus a number of currencies, but the US dollar has weakened by 30-40% against virtually all currencies that count. Therefore it is much more appropriate and correct to speak of a weak dollar than a strong euro!

Competitively speaking, that means raw materials and goods that are imported have become comparatively cheaper for the EU and other countries, while they have become comparatively more expensive for the US.

Thus, the low interest rates in the US and the recession feeds back on the competitive situation of the US in the world economy.

American media continue to focus on the rising price of oil, and how they drive inflation and increase energy costs.

While this is true, it is only true in an indirect sense. It’s not the oil that is extremely expensive – it was much more expensive in 1980, if measured in other currencies – it is the dollar that is weak.

Here’s that chart for the USD versus the Euro for the last 12 months:

Here is the Brent spot price for the same period:

Adjust oil prices for the dollar slip, and there is still a price increase, but it is actually not all that huge.

The dollar is weak because the US interest rate is low – actually negative when adjusted for inflation – and because the US banking system and credit markets are shaky. And the stock marked is in for a rough ride, whether Americans want to believe it or not. So investors, both inside and outside the US, go into oil and commodities.

This, of course, means the causes for the high oil price to a large extent is found in policy failures within the US. There really isn’t all that much cause to blame the Arabs or the rest of the world, certainly not for the current recession in the US, and only to a limited extent for the current oil prices.

The current American recession seems to me to be bigger and deeper than most commentaries, especially in the United States, would indicate. I will say much more about that in later postings.

I visit the US quite frequently. I follow American media. My feeling, strongly held, is that the seriousness of the current recession in the US is played down and not understood in the US.

I was strongly reminded of this when I recently read an article in New York Times about president Bush. The article stated:

Bush Acknowledges Tough Economic Times

By JOHN HOLUSHA

Published: March 14, 2008

President Bush acknowledged Friday that the nation’s economy was going through troubled times, but cautioned against overreacting to current problems, saying such actions could cause longer-term problems.

Speaking at the Economic Club of New York, Mr. Bush said “in a free market economy there will be good times and bad times” and acknowledged “we’re going through a hard time.”

Reading this, I at first felt that this sounded profound. Seemingly, the Danish newspaper Politiken thought so too. But then, a moment later, I felt like laughing. I may even have laughed. The statements strongly reminded me of one of my favorite movies, the hilarious Peter Sellers movie Being There (1979), based on Jerzi Kosinski’s novel Being There. The main character, Chance, is the epitome of every expert and too many politicians – full of platitudes and opinions. All empty, of course.

But I am sure president Bush did not intentionally promote the movie.