Another day of terrible economic news from around the globe: Britain loses yet another bank, manufacturing slumps across the globe in November, US and European markets resume their slide, reversing much of last week’s relief rally, the US is found to have been in recession for the past year, and there’s no sign of any good news.
US stockmarkets fell sharply, with the Dow and Standard & Poor’s 500 index falling rapidly and sharply (down around 7-9%); oil fell under $US50 a barrel, all major other commodities fell, gold by more than $US40 an ounce. European markets were also very weak.
The driver was the set of appalling surveys of manufacturing sectors in the world’s major economies: they were terrible, with record or near record falls and lows reached last month in Australia, China, the UK, Europe, the US and several other countries.
They confirm that there was another substantial worsening in activity last month, to follow the sharp slump already apparent in October.
The surveys, to be matched later this week by another set of similar surveys looking at the performance of the service sectors in the world’s leading economies, strongly suggest that the first half of 2009 could see the entire global economy in recession, with negative growth everywhere bar some Asian economies like China, but even there, growth will be slowing to levels not seen for a decade or more.
The figures signal that for Australia, hopes that solid growth in China would keep us out of recession next year are misplaced. The slump in Chinese manufacturing was to a record low, like Australia. Orders and exports were down in China, as was output, indicators of further pressures to come.
American manufacturing contracted in November at the steepest rate in 26 years and the US economy was declared to be in recession officially, and had been since December 2007.
Federal Reserve Chairman Ben Bernanke said overnight that US economic weakness will continue for some time, even if the government’s efforts to boost lending help restore the credit markets to normal. “The likely duration of the financial turmoil is difficult to judge, and thus the uncertainty surrounding the economic outlook is unusually large,” said Bernanke in a speech in Texas.
His comments added to the gloom on Wall Street and the decline quickened after his comments were released.
The US Institute for Supply Management’s factory index dropped to 36.2, below economists’ forecasts, and its measure of raw-material costs plunged to the least in six decades, intensifying concern over deflation. The report came as factory indexes in China, the UK, euro area, Australia and Russia all fell to record lows.
In the eurozone (covering the 15 nations sharing the euro) an index dropped to 35.6, the lowest since Markit Economics began the poll in 1998.
China’s Purchasing Managers’ Index fell to a seasonally adjusted 38.8 in November from 44.6 in October, the country’s Federation of Logistics and Purchasing said yesterday. Export orders, output and new orders all contracted by the most since the survey began in 2005, which matches reports of slowing shipments, falling industrial production and easing new business as a housing crunch drags activity in other parts of the economy lower and the global slumps hits the external sector.
As stunning as the manufacturing surveys were, the real surprise came with the official pronouncement that the US economy was now in recession and had been for the past year. The Business Cycle Dating Committee of the National Bureau of Economic Research said it made the determination during a conference call on Friday and it issued a statement overnight.
It’s a bit like saying you’ve had a broken leg for the past year and that’s why you’ve had trouble walking.
Although a recession is generally defined as two consecutive quarters of declining activity, the panel has its own criteria for determining a downturn.
A recession is a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income and other indicators,” the panel said in the statement. “A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.”
The committee said it “identified December 2007 as the peak month, after determining that the subsequent decline in economic activity was large enough to qualify as a recession.”
The panel said the factor that clinched their call was the 1.2 million drop in payroll employment so far this year. “The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. This series reached a peak in December 2007 and has declined every month since then.”
That will be added to with upwards of 300,000 more people losing their jobs according to market surveys.
The US economy contracted 0.5% in the third quarter after growing 2.8% in the previous three months. It shrank 0.2% in the December quarter of 2007, then rebounded for two quarters.
In London, the London Scottish Bank collapsed overnight and went into administration with deposits of around $A700 million. It lends to people with poor credit histories and has been weakening. It’s the fourth UK bank to fail or be rescued since the crisis started in August 2007.
The UK Treasury later revealed it would guarantee all deposits in the bank, not just up to the 50,000 pound limit under the Government’s new guarantee system.