More bad news from some of the world’s major economies with the European Community slashing its 2009 growth forecast, Spain losing its much cherished triple A credit rating, the Singapore Government revealing that it will raid its pension and other funds to help the economy and more important for us, more confirmation that the Japanese economy is sliding deeper into recession.

These reports overshadowed the second UK bank bail out overnight and confirmation that the Royal Bank of Scotland could lose a massive $A60 billion in the 2009 year, which would be the largest ever loss by a UK company and will almost certainly see the struggling institution nationalised in coming months.

As dramatic as the reports were headlines about a new ‘British bank bailout’ is merely more of the same: the health of the economies of Europe, the US, Asia and Australia remain the key influences on the health of the banks and there the news isn’t good and is worsening from the spate of news overnight.

The big story for Australia is the further deepening in Japan’s economic slump with November’s recast estimate of industrial production worse than previously thought. The 8.5% slump in output was even bigger than an initial estimate for a drop of 8.1 per cent, and was the biggest fall since comparable records began in 1953.

Compared with a year earlier, output was down 16.6%, the Ministry of Economy, Trade and Industry said in an announcement early this morning in Tokyo. Last week figures showed that Japanese machinery orders, a good indicator of the strength of corporate spending, plunged 16.2% in November from October. That was after a 4.4% drop in October.

Leading the way is the plunge in output by big companies, such as Toyota, Honda and Nissan, cement groups, steel and petrochemical companies. Technology and associated companies are also feeling the pinch and as profitability falls, they are slashing their investment plans, raw material purchases and staff numbers.

Toyota is heading for a rare loss in the year to March 31, as is Honda and possibly Sony, to name a few of the major Japanese industrial groups struggling with the impact of the slump in demand from abroad and at home.

Japanese companies have been heavy investors in new facilities in recent years, but the worldwide slump has seen demand melt away, leaving many of these new plants under utilised and unprofitable.
The problem is in every sector: finance, and banking, the media, cars, computer chips, food processing, you name it.

In Japan and Germany, which are major exporting powerhouses, the slump[ has hurt especially hard as both countries depend heavily on production and exports of complex, high margin products for consumers and industry.

In Europe, The Financial Times optimistically lead its report on the drop in the growth along the lines of: “Europe’s economy will start to emerge from recession in the second half of this year, provided that financial markets stabilise and governments rapidly implement their fiscal stimulus plans, the European Commission predicted on Monday.”

It wasn’t until the second paragraph that we got the news: “In its latest economic forecasts, the Commission said gross domestic product in the 16-nation eurozone would shrink by 1.9 per cent this year before recording modest growth of 0.4 per cent in 2010.” In December the forecast was for a 1% fall in the 15 economies of the eurozone. The Commission also said it saw 3.5 million jobs being lost in Europe this year.

The FT said the new EC forecast “was somewhat less pessimistic than that of many private sector economists. Analysts at Deutsche Bank, for example, predict a 2.5 per cent fall in eurozone GDP this year before a return to 1.0 per cent growth in 2010.”

European Central Bank President Jean-Claude Trichet said in a speech overnight that global economic growth this year will be “substantially below” forecasts made only about a month ago.
He said in Paris that said “world and European growth in 2009 will be substantially below the forecasts made at the beginning of December.”  Spain’s weakening economy and plunging housing sector have undermined its public finances and were the drivers behind the move by Standard and Poor’s to downgrade country’s credit rating from Triple A to Double A plus. The ratings group said that the global economic crisis had highlighted “structural weaknesses” in the Spanish economy that were inconsistent with triple A, the highest rating.

The cut follows a similar trim for Greece last week, while Portugal could be next as it was also warned by the ratings group. Meanwhile the French credit rating agency Coface sprang a surprise overnight by on Monday placing China and Russia on a negative watch list, citing the vulnerability of their companies in the face of a worldwide economic downturn. “The credit crisis is now affecting two leading emerging market countries, Russia and China, which in years past had enjoyed comfortable macroeconomic and financial situations,” said Coface head Francois David in the statement issued in Paris.

“But companies in these two countries are now experiencing strong vulnerabilities, already identified by Coface, that have been brutally accentuated by the current slowdown.”
China’s Coface rating is currently A3, with the agency foreseeing Chinese growth of 7% this year. China’s 2008 growth figures are due for release this week.

Russia, has a B rating from Coface, is predicted to have growth of 2.5% per cent this year. The Government has been lowering the value of the ruble in a series of small devaluations and overnight the new rate set was under that back in 1998 when Russia defaulted on $US40 billion of foreign debt.

Peter Fray

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