Monday, 2 March 2009

Economic contraction continues in early 2009

There was little to cheer about in last week's economic data. The United States economy performed even more poorly at the end of 2008 than previously estimated. And things are not looking any better for it and other major economies in early 2009.

US real gross domestic product shrank at a 6.2 percent annualised pace from in the fourth quarter of 2008, the most since 1982, the Commerce Department reported on Friday. This was considerably worse than the advance estimate of a 3.8 percent decline. Real GDP had fallen at a 0.5 percent annualised rate in the third quarter.

The Commerce Department noted that most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third, with the largest contributors being exports and equipment and software.

Other economic reports released last week showed that the US economy will probably continue to contract at a comparable pace in early 2009.

Manufacturing activity will probably continue to shrink. Orders for durable goods fell 5.2 percent in January, its sixth consecutive month of decline, according to another Commerce Department report.

Indeed, consumer spending as a whole is likely to remain weak. The Reuters/University of Michigan index of consumer sentiment fell to 56.3 in February from 61.2 in January.

Exports are not likely to make up for the decline in US spending. Real exports of goods and services deteriorated badly in the fourth quarter, decreasing at an annualised rate of 23.6 percent. Continued economic weakness elsewhere indicated by other recent reports means that this performance is not likely to improve soon.

Japan's economy contracted 3.3 percent in the fourth quarter of 2008. That translates into an annualised rate of 12.7 per cent.

Reports last week showed that there is no let-up in the contraction in the Japanese economy at the beginning of 2009. Household spending fell 5.9 percent in January from a year earlier. As in the US, exports are not compensating for the fall in domestic demand and have instead turned into a major drag on the economy, plunging 45.7 percent in January from a year earlier.

Japanese industrial production fell by a record 10 percent in January from the previous month. If this rate of decline is maintained for the rest of the quarter, we are likely to see another big drop in Japanese GDP in the first quarter of 2009.

Europe's economy is not in much better shape. The economy in the euro area contracted 1.5 percent in the fourth quarter of 2008 and appears to have also started off 2009 on a weak note. Last week, the European Commission reported that its economic sentiment indicator for the euro area fell to 65.4 in February from 67.2 in January.

It looks like the global economy remains firmly in recession.

No comments:

Post a Comment