Tuesday, 17 March 2009

The convulsion in world trade

This blog has analysed on several occasions that the current decline in financial markets, including share prices, has continued for 17 months to match in rapidity that after 1929 – i.e. the most severe recorded.

As may be seen from Figure 1 the rise in share prices on Wall Street in the trading week 9-13 March week did not break out of this declining trend. The shift so far has simply moved the rate of descent closer to the declining trendline that has been operating since October 2007 following several weeks of more precipitate than average falls.

Figure 1

09 03 16 Dow 2007 with trendline

As may be seen from the comparison in Figure 2 the rate of descent of the Dow Jones Industrial Average since October 2007 continues to be as rapid as in 1929 - i.e. it greatly exceeds in speed any other major share decline, apart from 1929, seen since the beginning of the 20th century.

Figure 2

09 03 16 Dow 1929 2007

Considering the relation between the financial decline and the productive economy, an article on this blog earlier this month also noted that, for the major industrialised economies, the annualised rate of decline in exports in the last three months has actually been more rapid than in 1929.

The latest statistical data released by the Organisation for Economic Co-operation and Development (OECD) for world trade up to December 2008, with data for more recent months in a few cases, allows the calculation of a picture for a wider range of countries that confirms this trend in striking fashion.

Due to the extremely rapid shift in the situation three indicators have been calculated for exports – the actual year on year decline to December 2008, the actual decline in exports since the peak month for each country or area last year, and the change during the three months to December 2008 on an annualised basis.

In order to give a historical scale of comparison the decline of US exports, in current prices, was 22.5% in 1929-30, 32.7% in 1930-31, 32.4% in 1931-32 and 4.0% in 1932-33 after which partial export recovery commenced - i.e. the most rapid annual rate of decline of US exports in the Great Depression, and the most rapid on record to date, was 32.7% in 1930-31. By 1933 US exports had fallen 66.2% below their 1929 level.

Considering first the OECD area as a whole, and the situation in the European region, the data is set out in Table 1. As can be seen for the OECD region as a whole exports have already declined by over 30% since their peak in April 2008 - essentially equaling the rates of decline of the worst year of the 1930s. The annualised rate of decline in three months up to December 2008 was an astonishing 64%.

For the major G7 economies the decline was only slightly less severe - with a decline of 26.9% since the peak in July and an annualised rate of decline of 57.8% in the three months to December 2008.

Within the Euro area the annualised rate of decline for the three months to December 2008 was 50.4% and for the OECD European region, which includes some East European states, the annualised rate of decline was 67.0%.

It may therefore be clearly said that in the field of trade, as in that of financial markets, the current decline is full comparable in speed of descent to the onset of the Great Depression. The difference, so far, is not in the speed of fall but in its duration. The decline in exports after 1929 continued for four years whereas so far the current decline has been occurring for a year.

Table 1

Turning to individual countries, Table 2 shows the figures for the largest OECD economies - the G7. As may be seen all have seen declines in exports of over 25% since their peak levels last year and in the three months to December 2008 all witnessed annualised rates of decline of more than 50%.

In short, the precipitate decline in world trade, at 1930s rates of descent, is not confined to smaller economies but fully affects the largest ones.

Table 2

Table 3 shows the rates of decline of exports for the non-G7 European OECD states. As may be seen with the exception of two small economies, Luxemburg and Ireland, which have done better than others, all OECD European countries have seen actual export declines of at least 25% and annualised rates of decline of 50% or more.

It is possible that the rate of decline for Spain, an incredible 99.7% annualised rate in the three months to December 2008, is a statistical freak or error but the annualised rates of decline for Sweden, Poland, and Norway are almost as severe - respectively, 79.1%, 82,8%, and 83.1%. Such rates may rightly be characterised not as decline but of collapse of exports in at least the short term.

Table 3

Exports Non G-7 Europe December 2008

Turning to non-European economies, the data is set out in Table 4. Again, with the exception of the small economies of Iceland and New Zealand, the highly publicised decline of Chinese exports by 22.3% since their peak last year, and at an annualised rate of 53.0% in the three months to December, are themselves actually significantly smaller than for other countries. Mexico and South Korea have already seen actual declines of exports of over 30% and South Africa and Turkey have seen falls of over 40%. The annualised rates of decline of exports for South Korea, Brazil, Indonesia, South Africa, and Turkey - at 70.7%, 72.4%, 78.2%, 82.1%, and 90.1% respectively - are clearly catastrophic.

Table 4

Countries for which OECD data is available for January confirm continuation of the same trend – as shown in Table 5. The chief difference is that with the extra month the actual declines in exports, as opposed to only the annualised rates of fall, have become more serious.

The actual falls recorded from the maximum levels of exports are 29.8% for Switzerland, 41.1% for South Africa, 41.4% for Sweden, 46.3% for Norway and 47.5% for Turkey. There is nothing in this pattern which indicates results for other countries are likely to show an improved tendency.

Table 5

Summarising the above data, of the 34 countries studied 14 had annualised rates of decline of exports of more than 70% and 20 had rates of decline of more than 60%. The widely publicised reports of declines of exports in the last three months of last year such as the annualised 51.9% for Japan, 53.0% for China, or 54.0% for the US, which attracted much publicity, are actually modest compared to the falls in most countries.

While the annualised rates of decline show the extremely striking implosion of world trade during the last three months of 2008 an annualised rate, naturally, indicates an, in this case extremely severe, tendency. What is equally disturbing is the factual falls in exports recorded from the maximum levels last year. Seven countries registered actual falls in exports of more than 40% and 19 of more than 30%.

It should be noted that trade today plays a more significant role in the world economy than at the onset of the 1929 crisis. Exports in an economy with relatively low exposure to trade such as the US now account for 12% of US GDP compared to 7% in 1929 - the figures for most countries are of course much higher. The result of any continuation of such rapid rates of decline of trade therefore, all other things being equal, would be more severe than in 1929.

The transmission mechanisms of the financial crisis into the productive economy are also made clear by such trends. As has been noted previously, initially in the present crisis there was a disjunction between the decline in financial markets, which was of 1929 magnitude, and the situation of the productive economy - which was of a severe but not equivalent decline. As such a disjunction is highly unlikely to continue either financial markets would recover, having overshot on the downside, or the trends and statistics in the productive economy would be shown to have been a lagging indicator and they would adjust downwards to the tendencies indicated in financial markets.

The extraordinarily powerful falls in world exports shown in the latest figures for all major economies indicate that the decline in trade is operating as a key mechanism by which the crisis revealed in financial markets is beginning to affect the productive economy. It may now be said that in two areas of the world economy, financial markets and trade, rates of decline are fully comparable to 1929 scale. How powerful the transmission mechanisms from the international sector are into domestic economies must clearly be carefully studied. The duration of the crisis is also critical - the so far unique severity of 1929 was not only due to the rapidity of the fall but by its duration. The decline in US trade and GDP in the 1930s continued for four years whereas the current decline in financial markets has lasted 17 months, the decline in trade slightly under one year, and the fall in GDP approximately six months.

Nevertheless quite sufficient data are now in to say with certainty that in the last three months of 2008 a convulsion in world trade occurred. The extreme rapidity of the fall in world trade, as with the situation in financial markets, confirms that the benchmark for present analyses must be not only post-World War II recessions but also 1929 itself.

* * *

This article originally appeared on Key Trends in Globalisation

Notes to Tables - peak month for exports in 2008

1. Peak January 2008
2. Peak March 2008
3. Peak April 2008
4. Peak May 2008
5. Peak June 2008
6. Peak July 2008
7. Peak August 2008
8. Peak September 2008

Saturday, 7 March 2009

The present present decline in world trade is so far more rapid than in 1929

A crucial question is assessing the current scale of the international economic crisis is examining the relation between the speed of decline in financial markets and the situation in the productive economy. This has direct policy implications as the depth of the economic decline necessarily determines the policies which are adequate to deal with it.

As Socialist Economic Bulletin has analysed on several occasions the rates of present falls on financial markets are entirely comparable to those following 1929 – i.e. the most rapid declines in history. Most published data on the productive economy, however, indicates a rate of decline not approaching that of 1929 – i.e. there is a disparity between the two indicators. An exception is that annualised figures for US GDP for the 4th quarter of 2008 regarding investment, exports and imports indicate rates of declines of post-1929 dimensions. However the annualised figure for US GDP itself for the 4th quarter of 2008 indicates a rate of fall about two thirds as fast as in 1929.

However, a part of this apparent ‘paradox’ of the disparity between financial and productive economy data can be that while financial markets may be followed in real time there is a delay in the calculation and publication of statistics on the productive economy. Current rates of economic decline are sufficiently rapid that delays between the actual current situation in the productive economy and the publication of data regarding it may lead to a significant distortion in the picture presented by at least some statistics.

This is most serious in the case of GDP data which is necessarily published with considerable delay due to the time taken to calculate it – revised data for US 4th quarter GDP figures only became available at the end of February. For that reason other indices than GDP, which may be available more rapidly, may indicate more accurately, if more partially, actual trends. Industrial production data, however, which is frequently taken as a more immediate measure of economic shifts, may be misleading in countries which are heavily dominated by service sector activities.

One of the most important of the available data sources is trade. This also directly relates to one of the key issues in the current economic downturn – globalisation and protectionism. During periods of severe recession a process of trade ‘de-globalisation’ frequently occurs – i.e. exports and imports fall more rapidly than GDP and therefore trade contracts as a percentage of GDP. The most extreme case of such trade ‘de-globalisation’ was following 1929 - when the decline in exports and imports was far greater than that for GDP in the US and other economies and was exceeded in magnitude only by the fall in investment. A similar pattern of the falling share of trade in GDP, on a much smaller scale, was seen during the most severe post-World War II recessions – for example in the US in 1981-82.

This article, therefore, calculates data on recent declines in exports and, as a benchmark, compares these to declines after 1929. The results are extremely striking. They indicate that, at least as regards a series of major countries, the current decline in trade is more rapid than that following 1929. If that process were to continue for any significant period of time the consequences, both in terms of the recessionary pressures that are implied and in terms of ‘de-globalisation’ and the rise of protectionist trends, would be extremely significant. These trends in trade, therefore, also provide some evidence that the extreme pessimism in financial markets, with post-1929 speeds of decline, may be justified by events in the productive economy.

To give an initial benchmark Table 1 shows the decline in exports for countries for which data is available in the first year following 1929. This data is the actual year on year decline measured in current price terms. As may be seen all countries suffered major export declines - the most severe contractions being in the US, Japan, Canada and the UK.

Post 1929 decline in exports

For comparison Table 2 shows the export trends to December 2008 for a series of major trading countries. December has been taken as the cut off point as Asia’s, and to a lesser extent other regions, trade figures are highly distorted by the fact that the Chinese lunar New Year holiday fell unusually early this year in January. This distorts year on year comparisons for January and February 2009.1

It should be stressed, therefore, in the light of the magnitude of the shifts revealed, that as the economic situation has been deteriorating the figures calculated to December indicate the scale of falls conservatively. It is likely trends worsened in January and February.

To indicate the rate of deterioration three figures are shown in Table 2 – the actual year on year fall in exports to December 2008, the six month June-December 2008 decline on an annualised basis, and the three month September to December fall on an annualised basis.

It may be seen that the rates of decline of exports in the last half of 2008 were of extraordinary magnitudes – even considerably exceeding the rates of decline seen in 1929-30. For the US to have suffered annualised rates of decline of exports of 32.6% for the last six months, and for 44.5% for the last three months is, respectively, half as much again as, and almost twice, the decline seen in 1929.

The annualised rates of decline for the last three months in South Korea and Japan, 71.8% and 81.5% respectively, may well have no equivalents for peacetime in major countries in history. Even the annualised figures for the rates of decline for exports for the last six months for Germany, South Korea, and Japan – 42.0%, 46.3% and 54.5% respectively – are at speeds which considerably exceed those for 1929.

09 03 06 Declines after 1929

An immediate caution must be made that an annualised rate of decline, even one based on a six month period, is not the same as an actual annual decline. In most countries the decline in exports commenced in July 2008 (in March 2008 in Japan and in October 2008 in Germany) and therefore actual year on year results for the period since then will not be available for some months. But the scales of drop in the last six months are so sharp that there would have to be an extremely great, and in the economic circumstances highly unrealistic, recovery of trade in the next few months for the declines in exports on a year by year basis not to be at least as bad, and probably worse, than those for 1929-30 – in some cases worse than 1929-30 by a significant margin.

As a further control on the data to avoid exaggeration Table 3 shows the actual (i.e. non-annualised) decline in exports since the peak month for the countries concerned. The trends, again, are evident. In all cases the actual drop in exports that has already taken place since the maximum levels last year is essentially equal to or exceeds that seen in 1929.

09 03 06 Declines since maximum

Such rates of decline cast further light on the apparent differences between the post-1929 scale of falls on financial market and the apparently much less severe declines in the published statistics for the productive economy. Such extreme falls in exports/trade increase the probability that financial markets are behaving rationally and that at least part of the apparent disparity between the post-1929 scales of decline in financial markets and the lesser falls in published statistical data is due to the time lag in statistical calculation – i.e. that the actual situation in the productive economy is worse than it appears from the necessarily time lagged published data.

Second, it indicates that the 4th quarter US GDP data, which indicated an extremely severe and rapid deterioration in trade, is not exceptional but may be repeated for other countries.

Such figures indicate that in at least one area, trade, the rate of decline in the productive economy is now at least as rapid as after 1929 – i.e. the most severe ever recorded in peacetime history.

The implications of this for policy are clear. If will take further data to be available to show the exact significance of this extremely rapid decline in trade - whether it will halt relatively rapidly, whether declines in GDP will also speed up greatly, or whether a sharp process of 'de-globalisation' occurs (i.e. trade falls very sharply but GDP does not, leading to a decline in the share of trade in GDP). But the trend in exports confirms the picture of the 4th quarter figures for US GDP regarding investment and trade - i.e. that the 'gap' between the extreme decline in financial markets and the less rapid decline in published statistics for the productive economy is so far being filled by a more decline in the productive economy not a recovery by financial markets.

As was stated in a previous post on SEB such a situation means that: 'the appearance of such tendencies clearly means that governments, policy makers and companies should not be seeking to minimise the gravity of what is taking place. It is more imperative at present to prepare for worse case scenarios than optimistic ones.'


1 For example South Korea’s export figures show a 32.8% year on year decline for January 2009 compared to a similar 17.3% year on year drop for February with this being likely to reflect not a rebound but depressed figures for January due to the holiday.

Wednesday, 4 March 2009

4th Quarter US GDP figures show shift to post-1929 rates of decline

Media reports on the latest release of official 4th quarter US GDP figures have concentrated on the headline revision of the annualised rate of decline of GDP from 3.8%, in the first published estimate, to 6.2% in the new one. It has also been stressed that this decline was significantly worse than the average of independent projections - which was for a 5.4% annualised fall.

However concentration on the headline GDP figure has distracted from examination of the detailed trends of the components of GDP, some of which are of very significant magnitude.

Until now the apparent ‘paradox’ of the international financial crisis was that, as Key Trends in Globalisation has analysed, the decline in financial markets was entirely comparable in rapidity to 1929, however the decline in the productive economy was far less severe than after 1929.

Such a paradox is highly unlikely to be maintained. The first possibility is that it will be shown that financial markets had overshot, that their decline is excessive, that there will not be anything approaching a post-1929 scale fall in production, and consequently financial markets will adjust back upwards – i.e. the variant that there will be an economic recession not a depression. An alternative is that it will be found that the 1929 scale financial falls are justified, and that it is merely a matter of a delay in time before the productive economy adjusts very severely downwards by the amounts that would justify a 1929 scale financial fall – i.e. the perspective not simply of a recession but of something approaching an economic depression.

The significance of the details of the 4th Quarter US GDP figures is that the rates of decline of components of GDP indicate that there is now a higher possibility of the second variant.

Such a trend does not, of course, necessarily imply that the scale of decline in US GDP will be the same as in the Great Depression - when GDP fell by 29.7%. But it would mean falls far exceeding in magnitude any post-World War II recession – the most severe recession in post-war US history being 1981-82 when GDP declined by 1.9%.

According to the new data, in the 4th quarter of 2008 US GDP declined at an annualised rate of 6.2%, consumer expenditure declined at an annualised 4.3%, private fixed investment fell at an annualised 20.8%, exports declined by an annualised 23.6%, and imports dropped at an annualised 16.0%.

The decline in US investment was not accounted for solely by the fall in the residential sector, produced by the sub-prime mortgage crisis, as the latter dropped by 22.2% - only marginally more than the overall investment decline.

To grasp the scale of magnitude of such rates of decline it is worth making a comparison to the actual falls in 1929-30 in the US – i.e. in the first year of the onset of the Great Depression. In that year US GDP fell by 9.4%, consumer expenditure by 6.7%, private fixed investment by 23.4%, exports by 15.4% and imports by 11.0%.

Comparing the two sets of figures, the annualised decline in US GDP in the fourth quarter of 2008 was about two thirds as rapid as the actual yearly decline in 1929-30 and the fall in consumer expenditure was similarly about two thirds of the first year of the Great Depression. But the rate of fall in investment in the 4th Quarter of 2008 was almost as severe as in 1929-30 and the rate of fall in US exports and imports was actually worse than in 1929-30.

Having made such a comparison it is necessary to state immediately that an annualised rate of decline is not the same as an actual annual rate of decline which has occurred as in 1929. It remains to be seen what will be the actual drop in US GDP during 2009. However the rates of decline of US investment, exports and imports in the last quarter of 2008 were fully comparable to those in 1929-30.

Other international data which goes in the same direction of post-1929 scales of fall are the extremely rapid rates of decline in Asian trade and industrial production. Exports by Japan, for example, dropped by 45.7% in January 2009 compared to a year earlier and its industrial production was down 30.0% over the same period. While these figures are undoubtedly exacerbated by the slowdown in the whole Asian economic region caused by the Chinese lunar New Year festival falling unusually early this year, in January, nevertheless anything approaching such scales of decline are figures fully comparable to 1929.

In short, elements are now appearing in the productive economy of a number of countries which overcome the’ paradox’ of the gap between the rate of decline of financial markets and the rate of decline of the productive economy in the negative variant – i.e. by the onset of declines in the productive economy of post-1929 magnitudes. Such trends are, of course, only just appearing and as yet are not consolidated. However the appearance of such tendencies clearly means that governments, policy makers and companies should not be seeking to minimise the gravity of what is taking place. It is more imperative at present to prepare for worse case scenarios than optimistic ones.

Talk simply of ‘recession’ is misleading. The issue is whether what will take place will be ‘merely’ the most serious recession since World War II or whether an actual economic depression will set in.

* * *

This article originally appeared on the blog Key Trends in Globalisation.

Monday, 2 March 2009

US share price decline continues to match fall after 1929

The latest market shifts confirm that to date in the present financial crisis the fall in US share prices continues to be at a post-1929 rate – see Figure 1.

Figure 1

Last Friday, 27 February, was the 352nd trading day since the all time high of the Dow Jones Industrial Average on 9 October 2007. Since its peak the Dow has declined by 50.1%. On the 352nd trading day following its 1929 high point the Dow had declined by 55.6%. The difference between the falls is within the range of short term fluctuations. Overall the rate of decline of US share prices since October 2007 is tracking the 1929 descent.

As may be seen from Figure 2 the current decline of share prices is far more rapid and deep than either of the other two major falls in the 20th century – that following the oil price increase of 1973 or following the implosion of the dot com share bubble in 2000. These trends confirm again that the only relevant scale of comparison for the current decline of US share prices is with 1929 itself.

Figure 2

The only fundamental difference between the current decline and that of 1929, so far, is the duration of the fall. After 1929 it took the Dow Jones 713 trading days to reach its bottom – the trough being on 8 July 1932 by which time the Dow it had lost 89.2% of its value. It remains to be seen for how long the current decline will continue. However although the duration of the drop is at least as yet not as great as after 1929 it is as rapid.

While the financial collapse is therefore genuinely on a scale to be compared to 1929, the overall declines registered in the productive economy are still far smaller than the post-1929 falls. However the declines in the productive economy have just commenced and data is still coming in. Some drops, such as in trade, are approaching scales seen post-1929. However the decline in US GDP in the 4th quarter, now revised downwards to an annualised decline of 6.2 per cent, is about two thirds of the 9.4 per cent drop in US GDP seen between 1929 and 1930 – however the rate of decline is accelerating.
While quite sufficient information is now in to make clear that the current financial crisis is only comparable to 1929, far exceeding the shifts seen in a normal recession, further data is still required to see whether it will be meaningful to compared the fall in production to that after 1929 or not.