Will Brown offers a brief survey of the economic prospects facing some key countries in 2009.

In a globalised economy, analysing developments country by country can mislead. A quick look at even one large company illustrates this. Toyota, the world’s largest carmaker, employs 320,000 across dozens of countries – it has 85 car plants operating in at least 15 countries – and sells cars in scores more. It sources components from around the world. They in turn are made from raw materials mined, smelted and refined in four continents. Toyota’s shareholders include many non-Japanese investors and the company borrows money from many banks. None of this shows up if you analyse country by country. Nevertheless, much economic news is reported on a national basis – and nation states are still very significant economic actors. So how is 2009 looking for the major economies of the world?

The USA

Obamanomics is turning from a newspaper headline into a policy. The plan is to create (or save) 3million US jobs over two years with the investment of $800 billion. The plan has got bigger as the economy has slumped since the election. The money will be spent on tax cuts for working Americans, aid to struggling state governments and infrastructure – especially in environmental projects, mass transit systems, high speed internet connections, school upgrades and improved health care. This is in line with the IMF’s call for 2% of world GDP to be invested by governments to avoid a return to the 30’s. It is doubtful whether the Obama boost will be enough. The most optimistic estimates suggest US unemployment will rise from 6.7% to above 8% next year. Car sales have collapsed from an annual rate of 16.2 million to just 10.2 million in November. US car plants are now running at 50% capacity – they need to run at 80% to make money. Saving the US car industry – which operates 30 plants employing 120,000 people in Michigan alone – is Obama’s immediate crisis. Retailing has had its worst Xmas in living memory. Macy’s, the largest US department store chain, is typical. It offered customers a $10 dollar coupon to spend on goods already discounted by 50%. The latest poll of consumers shows them more pessimistic than ever – despite falls in petrol and food prices. The housing market continues to fall – sales of existing homes fell another 8% in November and prices are down 13.2% on the year. The house builders expect prices will to for another 15 months – or as long as anyone can foresee. The US banking system is profoundly wounded – giants like Citigroup have shrunk to 90% of their share value a year ago, blue chip Goldman Sachs has made huge losses and taken government money, Lehman and Bear Sterns have disappeared. Big layoffs on Wall Street are set to continue. To finance the Obama rescue the US will need to sell unprecedented volumes of US Treasury debt to the Chinese, Japanese, Germans and Arabs – and anyone else with wealth left. These exporting countries need the US to succeed – but can’ afford to pay the whole price for the disaster. The Obama regime is the great test for those that believe Keynesian demand management can save capitalism and run it as a humane system.

China

For a decade China has enjoyed a 10% annual growth rate as it became the manufacturer for the world. Yet only 20 years ago, on June 4^th 1989, the Chinese leadership ordered the Peoples’ Army to open fire on student led demonstrators in Tiananmen Square. Prime Minister Wen Jiabao has announced that finding employment for the 6.85 million students who graduate next year will be a top priority. Slumping exports to the USA and Europe has already led to 10million migrant workers being laid off. Zhang Xiaojing of the governments’ Office of Macroeconomics says the regime fears that a combination of laid off workers and unemployed students will create social unrest if growth falls below 8%. The Chinese government, with $2,000 million of reserves, is boosting demand to try to offset the fall in exports. Exports fell 2% last month. In export dominated cities like Whenzou, 500Km south of Shanghai, over 20% of factories are shut down or working short time. Beijing has cut interest rates sharply. Fears of inflation have now been replaced by fears of deflation.

China’s peculiar mixture of a one party state, giant capitalist enterprises, minimal human rights and communist rhetoric will be seriously tested in 2009.

Russia

Last month 61 demonstrators were arrested in Vladivostok as riot police, flown from Moscow, cracked down hard on a demonstration about cars. In recent years there has been a big trade in second hand Japanese cars shipped into the Pacific seaport. Recently, sales of new Russian made cars have fallen dramatically as the economy slowed. So Prime Minister Putin slapped a 50% import tariff on the Japanese imports – favoured for their quality by many Russian drivers. This sparked protests across Russia by motorist groups – the biggest in Vladivostok. Riot cops had to be flown in because the local police couldn’t be trusted to be sufficiently vigorous. These developments reflect the threat of protectionist measures to the world economy and also of social unrest in Russia – where the government expects unemployment to rise to 10% this year. Russia has done well in recent years as strong demand for oil and metals has bolstered its economy. It has built up $400billion of foreign reserves. But since July the price of oil has fallen by 75% and metals by 50%. Many Russian wells are now pumping oil below production cost. Russian banks were unable to escape as investors pulled their money to the safest of safe assets – US treasury bonds. As elsewhere, these financial developments are now impacting on the wider economy – industrial production was 8.7% lower in November than a year ago. Layoffs and unpaid wages are rising. The Kremlin has used $160 billion of its foreign currency reserves to defend the rouble. In the early 1990’s a collapse of the rouble wiped out the savings of many Russians. Once bitten, recent reports suggest Muscovites were quietly changing their roubles for dollars again. Mr Putin and his allies must manage a steady depreciation of the rouble without generating a panic run on Russian banks – or running out of foreign currency. And they must supervise a big rise in unemployment without a breakdown of social order. Not easy for politicians who promised prosperity and jobs in exchange for ‘democracy lite’.

Iceland

Perhaps eventually Iceland will regard itself as fortunate in being the first country to go bust. Reykjavik has been able to borrow $10billion from the IMF, Scandinavia and Britain. And the capital is full of job adverts from the Norwegian construction industry. In a years time there might not be such help around. As it is, the Icelanders are paying dearly for the recklessness of their banks that borrowed a fortune, short term at high rates, and gambled the money on reckless investments – many in British retail. Icelandic inflation and interest rates are both 18% as the government struggles to save the Krona. Unemployment has trebled. Many middle class Icelanders put their savings in the Icelandic stock market an
d have been wiped out. There is bitterness towards the politicians and bankers – and Britain’s New Labour. When the Icelandic banks failed Alastair Darling used anti-terrorist legislation to freeze Icelandic assets in the UK. HM Treasury has lent Iceland £2billion so British savers can be repaid in full. The Icelandic government is desperate that a punitive interest rate shouldn’t be attached to this loan. They have granted legal aid to any Icelander wanting to sue HM Government. In the meantime, a large chunk of the stricken British high street owes money to the Icelandic government after they nationalised banks that had invested in the House of Fraser, Debenhams and others. The lack of cooperation between Iceland and Britain doesn’t bode well for the world in the face of the credit crunch. Iceland has already been forced to apply for membership of the Eurozone – perhaps the UK won’t be long in following.

Europe

Until recently the German and French governments, at the heart of the Eurozone, have regarded the crisis as a largely Anglo Saxon affair. Their banks have not, in general, been as reckless as those on Wall St and in the City, their consumers have not racked up enormous debt, their housing markets have not gone berserk. Such complacency is ebbing away. Germany is the world’s single largest exporter. It will suffer intensely from a fall in world trade. Its massive car industry (Mercedes, BMW and Volkswagen) has been hammered by the global collapse in car sales. Germany has been very reluctant to increase government spending or cut interest rates to boost demand. The Germans have a very high saving rate – as do the Japanese – and Germany is still haunted by the hyperinflation of the 1920’s. In the face of recession it is believed Germans will just save tax cuts rather than spend them. So there has been no big public spending splurge and Eurozone interest rates are still 2%. But as export markets contract, rapidly mounting unemployment is making dramatic action likely. The edges of the Eurozone are in a weaker position – banks are in trouble in Ireland, housing has crashed in Ireland and Spain, rising unemployment is fuelling social unrest in Greece. And the new economies of Eastern Europe are looking very fragile. Several have needed IMF bailouts to support crashing currencies. When the Euro was launched many in the City of London predicted the system would fall apart as soon as the world economy had any difficulties. With sterling reaching parity with the Euro as the City of London goes bust, Frankfurt and Paris can be excused for smuggery. But there is every indication that the Eurozone is yet to face its fiercest test.

The UK

Bristol’s newest shop has just opened in Bedminster. Its called ‘Cheap Carpets’. The name is glued to the frontage in letters cut out of – cheap carpet. They sell off-cuts of cheap carpet. Welcome to Gordon Brown’s recession.

Having followed the two key policy goals inherited from Thatcher’s Tories – slavish adherence to the USA and to the City of London – New Labour’s Britain is not well placed to weather the crisis. The vaunted bailout of the banking system now appears inadequate – the banks look like needing more money as their balance sheets are destroyed by the recession. The collapsing housing bubble (less than a generation after the collapse of the previous one) shows no sign of finding a floor – house sales are still falling and prices are expected to drop another 20%. Building and property companies are a disaster. City centres are full of empty office blocks, many newly built. The UK’s ‘lean and efficient’ retail sector is in turmoil with desperate Xmas sales by chains facing bankruptcy. Selling goods at 70% discount is no way to make profit. With world demand collapsing it is not clear that sterling’s precipitate fall will greatly bolster manufacturing. The domestic car market has fallen 40% and all eyes are on the fate of Land Rover Jaguar. The British government plans to raise huge sums to bail out the banking system, finance dole queues and cover falling taxes by selling £billions of UK Bonds (Gilts). With the currency plummeting, foreign investors will be reluctant to buy Gilts when they can choose to buy Japanese, German or American debt instead. It looks like it will be a difficult year. It will take more than Gordon Brown being pompous and a viscous attack on the postal workers to save the day.

Japan

Japan is the world’s second largest economy – built around large, successful companies that focus on exporting: Honda, Toyota, Sony and Mitsubishi. Over the last 3 months the Japanese economy has shrunk dramatically as world demand has fallen. Industrial output fell 8.1% from October to November – the biggest fall since records began in 1953. A similar fall is expected next month. Toyota – the world’s largest carmaker, employing 320,000 worldwide, has recorded its first ever loss. Honda’s sales in the USA, its largest market, have fallen 30%. Japanese steel output has fallen 10% over the year. With unemployment rising and output falling, tax revenues are expected to fall 13.9% over the coming year. The Japanese government already has a large deficit following its attempts to boost the economy in the 90’s. Japanese households have cut spending every month this year – in the expectation of tough times ahead. The Bank of Japan has already cut interest rates to 0.1%. With strong companies, social cohesion and enormous private sector reserves, the Yen has risen to record levels – further hampering Japanese exporters. Unable to force its citizens to spend more, unable to cut interest rates further and with a big budget deficit, the Japanese government currently has limited room for manoeuvre.

Will Brown

Totterdown

Bristol