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.'

Notes

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.

1 comment:

Mr Banks said...

What is relevant from the decline in stock markets, and what's not

Once again, an incisive (and deeply disturbing) blog. One point though, on the decline in stocks. The comparison beween stock market declines now and in 1929 onwards should be treated with caution. Many commentators and financial market chart-watchers have frequently referred to these parallels, eg. Martin Wolf in the FT has dusted off that chart about 3 or 4 times in the last 10 years. An old financial market saw has it that stocks have correctly predicted 7 out of the last 2 recessions.
That the parallel can be frequently cited tends to suggest that all large stock market declines initially look the same. Instead, it is the cumulative absolute decline that places the current crash on a par with 1929 and, as John points out, more worryingly, the output data are starting to do the same, led by the external sector.