21 Dec 2011
Then and Now: Economic Crises Compared
The global economy is only expected to see halting growth
The world economy is back in trouble. Following the sharp rebound from the 2009 global recession, economic headwinds have increased markedly since the second quarter of 2011. While Japan’s supply chains are recovering at speed, the slower-than-expected recovery in the United States (accompanied by political haggling over the debt reduction plan) and, more worryingly, the deepening European sovereign debt crisis are all mounting causes for concern.
Faced with a “double whammy” of economic weaknesses in Hong Kong’s major trading markets, the global economy is braced for a renewed downturn in the year ahead. Examining past crises and experiences may serve as a guide to the likely impact of the latest developments on exports.
The causes of the world’s intermittent economic crises are as wide-ranging as they are predictable or unpredictable; they include national and international policy errors, supply shocks – especially oil shocks – as well as malfunctions of the financial sector, as in the US from 2007-2009.
More importantly, these events have occurred most recently in key developed economies. In particular, US economic crises have had a knock-on effect on a global scale, given the country’s entrenched position in the world economy.
Since the Great Depression of 1929, there’ve been a total of 13 recessions in the US. Prior to the most recent, starting from late 2007, the deepest recessions were those of 1973-1975 and 1981-1982, both stemming from oil crises and lasting for 16 months.
The last US recession has been the most severe since the Great Depression. Lasting 18 months, this recession began in December 2007 and ended in June 2009. The underlying cause was a subprime mortgage crisis that led to the collapse of the US housing bubble and falling housing-related assets, which in turn triggered a financial “tsunami.” As a result, many countries fell into recession, with world GDP shrinking 0.7 per cent in 2009, the deepest downturn in 80 years.
Although the global economy has since recovered, the aftermath of the financial meltdown remains with us. However, the Great Depression remains the longest and deepest downturn in the history of the US and many other nations, lingering more than 43 months from August 1929 to March 1933. It was a phenomenon that originated from a US recession, accompanied by the stock market crash of October 1929. The US depression, in turn, sparked a global contagion exacerbated by US trade protectionism that ultimately led to a fully-fledged trade war.
The decline in world and US GDP during the Great Depression far exceeded the contraction of the latest recession. In both crises, fast credit expansion and new financial instruments brought about high leverage and increased susceptibilities to shocks, and a malaise in the US financial sector spilled over to the real economy as well as other countries at a rapid pace.
There are also major differences. Government policy support was almost absent in the Great Depression, while US protectionism contributed to a global trade war. That’s in contrast to the unprecedented policy support and lack of pervasive resort to trade restrictions in the latest episode.
And while the US has been at the epicentre of both crises, its economic weight has notably fallen. Developing countries, such as China and India, have assumed a more important role in the global economy.
While developing economies may not be spared from a downturn induced by developed economies, they’re well poised to weather the adverse impact due to sound fundamentals, providing a buffer against the latest recession and any renewed crises. So even if the economic difficulties have increased after the global rebound in 2010, the chance of a renewed downturn similar to the Great Depression is still remote.
Struggling with the downturn: confidence the key?
Some experts see a repeat of Japan’s “lost decades” happening in the US and Europe. Since the early 1990s,, Japan has suffered from an extended period of economic stagnation and price deflation amid the bursting of its equity and property bubbles in 1989. Compare and contrast that with the early 1980s, when Japan’s economic performance was the envy of the world.
In some ways, the parallels between Japan’s lost years and the more recent global financial meltdown are telling. Both property bubbles were fuelled by easy credit and new financial instruments.
There’s a prominent dissimilarity, however. While the US (as well as other countries) was prompt in providing a policy response to contain the crisis, Japan delayed taking remedial action, waiting more than a year before cutting interest rates. By the time the Japanese government utilised huge funds to revive growth in the late 1990s, the Japanese economy was already in a prolonged slump, accompanied by ingrained deflation.
If anything, the crux of the current downturn is arguably an erosion of confidence. Yet, developments are only mediocre today. In the US, continued monetary easing should help avoid deflation and restore confidence. In the EU, the coordinated efforts enlisted by Eurozone members to resolve the debt crisis, which entail an expansion of the European Financial Stability Facility, are expected to bring some relief. However, the EU region, especially the more heavily indebted member states, is going to remain in difficulty.
Complicated 2012 Ahead
Despite higher unit values, Hong Kong exports are expected to show marginal growth next year
Although Japan’s supply chains have been recovering at a rapid pace, the slower-than-expected recovery in the US and, more worryingly, the spectre of an EU sovereign debt crisis, are major causes for concern.
Even with prevailing efforts to stem the crisis, there is still a lack of action to stimulate growth. Fiscal austerity, however, will be ubiquitous in Europe. As such, consumption, and hence, import demand in most traditional markets, will be subdued.
Given their solid economic fundamentals, emerging economies should have a reasonably good chance to weather the current crisis with moderate slowdown. Of particular interest to Hong Kong exporters, abundant business opportunities exist in a number of markets. Holding particular potential are Asian countries with large domestic markets such as India, Indonesia and especially the Chinese mainland.
Also attractive are commodity-exporting nations, including Russia, Brazil and some Middle East countries, which are slated to benefit from sustained commodity prices. Prices of crude oil and other commodities like base and precious materials should slacken from the highs stemming from the outbreak of political unrest in the Middle East and North Africa (MENA), but are still likely to remain firm. Sustained oil and other commodity prices could presage better market prospects for commodity-exporting nations.
Hong Kong firms are also facing significant challenges arising from higher wages in China, as the 12th Five-Year Programme strives to tackle structural problems constraining domestic consumption.
Separately, a strong renminbi against the US dollar in the face of mounting appreciation pressures in the run-up to next year’s US presidential election will translate into even heavier production costs. Some firms may also face persistent borrowing costs amid the uncertain external environment. But most Hong Kong companies are not able to fully transfer the higher costs to customers for fear of losing business.
Leaner and Meaner
To some extent, the upward price pressure on Hong Kong exports is expected to persist in 2012. While consumer frugality in overseas markets will translate into downward price pressure on Hong Kong exports, the juxtaposition of skyrocketing labour costs on the Chinese mainland, the unremitting revaluation of the renminbi in tandem with still-high prices of crude oil and other commodities, will exert even sturdier upward pressure on input costs.
As a result, the unit values of Hong Kong exports should continue to rise, although such increases will be unlikely to offset escalating input costs completely, eroding exporters’ profit margins.
Despite higher unit values, Hong Kong exports are expected to show only marginal growth next year. Renewed downturn of the global economy, alongside the attendant sluggishness in overseas demand, will depress the expansion of Hong Kong exports.
The HKTDC forecasts Hong Kong’s total exports to increase by one per cent in value, but fall by three per cent in volume. Re-exports, which account for the bulk of Hong Kong’s exports, are also expected to grow by one per cent in value but drop by three per cent in volume. Domestic exports are likely to contract by 15 per cent in nominal terms and 19 per cent in real terms.
For details on the latest HKTDC Export Index, please see the December issue of the HKTDC Trade Quarterly, which can be ordered at: http://bookshop.hktdc.com/.