Obama defers autos bailout, Europe remains gloomy

Bloomberg reports the decision that sent global markets into a tailspin on Monday.

President Barack Obama gave General Motors Corp. and Chrysler LLC deadlines to “fundamentally restructure” or lose government aid that has kept them alive.

Obama rejected the companies’ recovery plans and forced GM Chief Executive Officer Rick Wagoner to resign. He gave GM, the biggest U.S. automaker, 60 days to develop a new strategy. Obama said No. 3 Chrysler can’t survive on its own and gave it 30 days to complete a partnership with Italy’s Fiat SpA.

Meanwhile, Europe had enough bad news of its own. From Bloomberg:

An index of executive and consumer sentiment in the euro area declined to 64.6, the lowest since the indicator began in 1985, from 65.3 in February, the European Commission in Brussels said today. Gauges for industry, services and consumer sentiment all reached record lows. A separate report showed that Spanish consumer prices fell from a year earlier for the first time ever, indicating deflationary pressure that may spread.

ECB President Jean-Claude Trichet made little attempt to hide the gloomy picture in a speech on Monday.

“We expect demand to remain very weak throughout 2009 before gradually recovering in the course of 2010,” Trichet told European lawmakers in Brussels today. “2009 is a very, very difficult year, where you have to accept negative growth all across the year,” he said, adding that “I trust we will have this recovery in the course of 2010.”

The finding from a recent retail survey did show an improvement though. Again from Bloomberg:

European retail sales dropped for a 10th month in March as job cuts and deteriorating consumer confidence hurt household spending, the Bloomberg purchasing managers index showed.

The measure of euro-region sales was at 44.1 from a revised 42.3 in February, where a reading below 50 indicates contraction. The indicator has stayed below that mark since June...

There was also positive news from the UK. From Reuters:

The number of loans approved for house purchase rose to 37,937 in February from 31,791 in January, the Bank of England said on Monday, the highest since May 2008 and above forecasts for a modest increase to 34,000.

Mortgage lending rose by 1.507 billion pounds, almost double analysts' forecasts for an 800 million pound rise, and up from just over 1 billion pounds in January.

Analysts said the figures offered a first indication that activity in the sinking housing market may have passed its low point, but that prices were likely to continue to sink for months to come.

And UK consumers became less gloomy in March. Again from Reuters:

The GfK/NOP consumer confidence barometer rose to a 10-month high of -30 in March from -35 in February, confounding expectations for an unchanged reading...

The biggest improvement related to people's expectations for the economy which rose to -31 from -40 in February.

Japanese exports and industrial production dive

Despite the fact that Japanese banks largely avoided the financial excesses seen in the United States over the past few years, its economy has been among the hardest hit among developed countries.

February economic data have been pretty horrific.

Last week, the Ministry of Finance reported that exports fell 49.4 percent from the previous year, worse than the 45.7 percent decline in January. Imports fell 43.0 percent in February.

Today, the Ministry of Economy, Trade and Industry reported that industrial production fell 38.4 percent from the previous year in February. From January, industrial production fell 9.4 percent on a seasonally-adjusted basis.

Economic activity in Japan fell off a cliff in the fourth quarter of last year. The dive seems to have continued in the first quarter of this year.

Still, February data have also provided some tentative signs of stabilisation. The Nomura/JMMA Japan Manufacturing Purchasing Managers Index rose to 31.6 in February from a record low of 29.6 in January. The consumer confidence index rose to 26.7 in February from 26.4 in January, the second consecutive rise in the index. The economy watchers survey also showed that the diffusion indices for both current and future conditions rose for the second consecutive month.

Even today's poor industrial production report came with something positive. The survey of production forecast showed that companies expected production to increase 2.9 percent in March and 3.1 percent in April.

So while the latest data may look bad, there is hope that this may turn out to be as bad as it gets, at least in terms of rate of contraction.

Europe contracts and Japan faces deflation as US consumer spending slows

Europe is clearly in recession. Friday brought us news that France’s economy contracted 1.1 percent in the fourth quarter, the steepest decline since the final quarter of 1974. The UK economy contracted 1.6 percent in the fourth quarter, the sharpest decline since 1980.

And the recession is likely to persist for at least a while more. From Bloomberg:

Industrial orders in the euro area fell 34 percent from the year-earlier month, the European Union statistics office in Luxembourg said today. The January drop was the biggest since the data series started in 1996 and exceeded the 28 percent decline economists forecast in a Bloomberg News survey. From the prior month, January orders fell 3.4 percent.

Meanwhile, deflation looms in Japan. From Bloomberg:

Japan’s consumer prices stalled in February and retail sales tumbled the most in seven years, signaling a return to deflation is likely to deepen the recession.

Prices excluding fresh food were unchanged from a year earlier, the statistics bureau said today in Tokyo. Retail sales declined 5.8 percent, the Trade Ministry said, more than the 3 percent economists predicted.

The outlook for the global economy, however, still depends to a large extent on the US economy's performance. There, the news on Friday was somewhat mixed, as Bloomberg reports:

American consumers’ spending slowed in February and their confidence remained near a three-decade low this month, reflecting the toll of a deteriorating job market.

Purchases advanced 0.2 percent after climbing 1 percent in January, the Commerce Department said today in Washington. The Reuters/University of Michigan final index of consumer sentiment was 57.3 in March after 56.3 in February...

Adjusted for inflation, spending dropped 0.2 percent, following a 0.7 percent gain the prior month.

Disposable income, or the money left over after taxes, decreased 0.1 percent, after rising 1.6 percent the previous month. Adjusted for inflation, disposable income dropped 0.4 percent...

Still, the inflation-adjusted spending so far this quarter is higher than the fourth-quarter average, setting the stage for a gain after plunging late last year.

European confidence falls, UK retail sales plunge

US GDP has been revised to show a 6.3 percent annual rate of decline in the fourth quarter of 2008. While a Bloomberg report suggests that the US economy may be at a turning point, data on European economies on Thursday remain negative.

Another Bloomberg report says confidence in Europe is still falling.

Italian business sentiment dropped to the lowest on record and German consumer confidence fell for the first time in seven months, adding to signs the recession is deepening across the continent.

The Italian business-confidence index declined more than economists expected to 59.8 in March, the lowest since the data series started in 1986, the Rome-based Isae Institute said today. In Germany, Europe’s largest economy, GfK AG’s confidence index for April fell to 2.4, a separate report showed. French consumer sentiment held near an all-time low in March, according to data from the government in Paris.

Reuters reports that UK retail sales plunged in February.

Retail sales plunged in February, posting the lowest annual growth rate in more than a decade, as heavy snowy and economic gloom kept consumers away from the shops, official data showed on Thursday...

Sales volumes fell 1.9 percent in February, nearly five times the fall expected by analysts, bringing to an end a run of surprisingly robust figures that had shown sales holding up well over Christmas.

The annual rate of growth fell to 0.4 percent, its weakest since September 1995, the Office for National Statistics said.

US durable goods orders and new home sales rise

James Hamilton asks: Is the worst behind us? Data released on Wednesday provide hints that maybe it is.

Bloombertg reports Wednesday US economic reports.

Orders for durable goods and sales of new homes unexpectedly rose in February, reports today showed, a sign of improvement in two of the biggest drags on the U.S. economy.

Last month’s 3.4 percent increase in bookings for long- lasting goods such as machinery and computers was the biggest gain in more than a year and the first in seven months, Commerce Department figures showed in Washington. Another Commerce report indicated new-home sales jumped 4.7 percent from a record low pace in January.

And it may not be just in the US that the worst is over. From Bloomberg on Tuesday:

Europe’s manufacturing and service industries contracted for a 10th month in March...

A composite index of both industries was at 37.6 compared with a record low of 36.2 in February...

The euro area’s manufacturing index rose to 34 this month from 33.5 in February, while the services index rose to 40.1 from 39.1, Markit said. The composite index of new orders rose from a record low last month, while the employment measure fell to 40.3 from 40.8.

Meanwhile though, Bloomberg reports that German business confidence fell in March.

German business confidence fell to the lowest level in more than 26 years in March, adding to signs that the recession is deepening.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, dropped to 82.1 from 82.6 in February. That’s the worst reading since November 1982. Economists expected a decline to 82.2, according to the median of 37 forecasts in a News survey.

But even here, there is a silver lining.

Ifo’s gauge of current conditions declined to 82.7 from 84.3. Still, the measure of expectations increased to 81.6 from 80.9.

Looking grimmer perhaps was Japan's February trade report as exports plunged 49.4 percent in February from a year earlier. But yet again, there was something positive out of the report: the trade balance moved back into surplus, albeit one down 91.2 percent from a year earlier.

US Treasury unveils plan, markets surge

The US Treasury Dept unveiled its plan to clear banks' toxic assets on Monday. MarketWatch reports:

After months of delay, the Treasury Department detailed a plan Monday to clear out as much as $1 trillion in so-called toxic assets from the financial sector in an effort to strengthen the banks enough to get them to lend again.

The public-private plan would have private investors and the Treasury put in equal amounts of money that would then be backed by a loan guarantee from the Federal Deposit Insurance Corp. to buy loans and mortgage-backed securities from the banks.

Both the taxpayers and the private investors would gain from any profits if the assets eventually gain value. The taxpayer would take most of the downside risk.

Investors seem to like the plan. From Bloomberg:

U.S. stocks rallied, capping the market’s steepest two-week gain since 1938, as investors speculated the Obama administration’s plan to rid banks of toxic assets will spur growth and investor Mark Mobius said a new bull market has begun. Treasuries and the dollar fell...

The S&P 500 gained 7.1 percent to 822.92, its biggest increase since Oct. 28. The Dow Jones Industrial Average jumped 497.48 points, or 6.8 percent, to a five-week high of 7,775.86. The MSCI World Index climbed for the ninth time in 10 days, adding 5.4 percent. Twenty-one stocks rose for each that fell on the New York Stock Exchange, the broadest rally since at least July 2004.

Or maybe investors just like any plan. Stock markets had been up even before the details of the plan were released. AFP/CNA reports:

Global stock markets surged Monday as investor optimism grew ahead of the official launch of a 500-billion-US-dollar US government plan to purge banks of toxic assets.

In morning European trade, Frankfurt won 2.04 per cent, London gained 2.02 per cent and Paris soared 1.37 per cent in value.

In Asia, Tokyo leapt 3.39 per cent, nearing a two-month high, and Hong Kong rocketed by 4.78 per cent.

As Fed steps up deflation fight, will history repeat itself?

Last week, the Federal Reserve took yet another step in easing monetary policy and fighting the credit crisis. It is a step, however, that is not without risk.

On 18 March, the Federal Open Market Committee (FOMC) announced that, to help improve conditions in credit markets, the Federal Reserve will purchase longer-term Treasury securities over the next six months. This is a departure from its usual policy of buying only short-term securities.

The obvious impact of this move will be to depress yields on longer-term Treasuries. Indeed, on the day of the FOMC announcement, the yield on the 10-year note fell 47 basis points, the most since January 1962.

The Fed's purchase of longer-term Treasuries allows it to provide more effective monetary stimulus and is expected to have at least some positive effect in promoting lending and economic growth and staving off deflation.

One side effect of the move, though, is that the yield curve, or the spread between long-term yields and short-term yields, will no longer be a reliable indicator of the economic outlook. By pushing longer-term yields down, the move will tend to narrow the spread between those yields and short-term yields, flattening the yield curve. In normal times, a narrower spread would indicate deterioration in the economic outlook. With the latest Fed policy, however, the latter would no longer be the case.

Nevertheless, the yield curve may still be able to tell us something about the near-term future of the United States economy. Why? Because it usually forecasts the economy several quarters in advance. That is, the near-term outlook for the economy can be assessed using past yield curve when it was not affected by the latest Fed policy.

In February and early March, the 10-year Treasury yielded around 2.9 percent while the 3-month Treasury yielded around 0.3 percent. That gives a spread of about 2.6 percentage points.

In past recessions, by the time the spread between the 10-year yield and the 3-month yield had risen to this level, the recession was either close to or already at an end. For example, in the prior recession in 2001, the spread rose to this level in November, right at the end of the recession.

This suggests that the Fed has introduced its latest policy to buy long-term Treasuries to improve credit markets at a time when the recession is already close to or at an end.

One could argue though -- and quite correctly -- that today's recession is different from most past recessions because a credit crunch is aggravating monetary conditions. One way to better account for the credit crunch is to use the spread between the 10-year Treasury yield and the London interbank offered rate (LIBOR) for three-month US dollar loans rather than the spread between the 10-year Treasury yield and the 3-month Treasury yield.

However, even this measure provides a relatively optimistic forecast. While the difference between the 3-month LIBOR and the 3-month Treasury yield had surged to well over 4 percentage points in October last year, credit markets have improved since then to the extent that the spread has now fallen to around one percentage point.

As a result, the spread between the 10-year Treasury yield and the 3-month LIBOR had risen to around 1.6 percentage point in February and early March. Again, in past recessions, by the time this spread had risen to this level, the recession was either close to or already at an end. For example, in 2001, the spread rose to this level in September, just two months before the end of the recession.

It is probably premature to say, based on term spreads alone, that the recession is coming to an end. Bank balance sheets and financial systems remain impaired, so normal lending growth is unlikely to resume in the near future and even the LIBOR-based spread may not be providing a reliable forecast of the economy.

Still, the longer-term risk of excessive monetary stimulus must not be ignored. While the Fed's move last week to buy long-term Treasuries is aimed at alleviating short-term deflation concerns arising from the recession and credit crisis, it also has the potential to stoke inflation over the longer term.

One thing the recent past should teach us is that inflation prevention must not be ignored even in the midst of a near-term deflation threat. Back in September 2001, in the wake of terrorist attacks on the US homeland that threatened to negatively impact spending and economic growth, the Fed had cut interest rates by 50 basis points, lowering the target federal funds rate to 3 percent. Subsequently, with inflation apparently tamed, the Fed focused on fighting deflation instead and continued to ease monetary policy for another two years, the federal funds rate finally settling at 1 percent in 2003, by which time spreads between the 10-year Treasury yield and short-term yields were well over 3 percent. The sustained monetary easing was to eventually stoke a credit bubble that culminated in today's financial crisis.

So hopefully, the financial crisis has taught the Fed that even as it fights the short-term deflation threat, it must keep one eye on longer-term inflation potential. And it must now do so without the benefit of the yield curve as an early indicator since its move to buy long-term Treasuries will distort that indicator.

If the Fed fails to keep the necessary balance between short-term and longer-term concerns, we may yet see history repeat itself.

US leading index declines, IMF projects global economic contraction

It looks like the US recession is not about to end soon. From Bloomberg:

The Conference Board’s index of leading indicators, a gauge of the economy’s direction over the next three to six months, fell 0.4 percent in February, less than forecast. Manufacturing in the Philadelphia area shrank for the 15th time in 16 months, a Federal Reserve report showed, and the Labor Department said 5.47 million Americans are getting jobless benefits.

Meanwhile, the IMF sees the global economy contracting as well.

Global activity is now projected to contract by ½ to 1 percent in 2009 on an annual average basis—the first such fall in 60 years, the IMF said in an analysis provided to the Group of Twenty (G-20) industrialized and emerging market economies. Global growth is still forecast to stage a modest recovery next year, conditional on comprehensive policy steps to stabilize financial conditions, sizeable fiscal support, a gradual improvement in credit conditions, a bottoming of the U.S. housing market, and the cushioning effect from sharply lower oil and other major commodity prices.

Fed, BoJ step up the easing

The Fed finally made its long-anticipated move on Wednesday. From Bloomberg:

The Federal Reserve opened a new front in its battle to bring down borrowing costs across the economy, pledging to buy as much as $300 billion of Treasuries and stepping up purchases of mortgage bonds.

The announcement following the Federal Open Market Committee meeting today in Washington spurred the biggest rally in longer-dated Treasuries in decades. Officials unanimously voted to expand the Fed’s balance sheet up to $1.15 trillion, and said they may broaden a program aimed at boosting consumer loans to include other assets, today’s statement showed.

With today’s move, the Fed has committed to buy or loan against everything from corporate debt, mortgages and consumer loans to government debt, after cutting its benchmark interest rate to zero failed to end the credit crunch...

The central bank will begin purchases of longer-term Treasuries “late next week” and buy the securities two to three times per week, the New York Fed, which will manage the operation, said in a statement. The transactions will be concentrated in two-year to 10-year debt the statement said; 30- year bonds underperformed 10-year notes as a result.

Somewhat ironically, this announcement came on the same day as a report showing that inflation picked up in February, the consumer price index climbing 0.4 percent after a 0.3 percent rise in January.

The Fed will not be the only central bank stepping up its buying of government debt. The Bank of Japan has committed to do the same. AFP/CNA reports:

Bank of Japan governor Masaaki Shirakawa said it was too soon to say the global financial system was on the mend, despite the recent rally on world stock markets...

The Bank left its key lending rate on hold at 0.1 per cent for a third straight month, as expected.

It also said it would boost its outright purchases of Japanese government bonds by almost 30 per cent to 21.6 trillion yen (219 billion US dollars) a year to keep credit flowing during the economic downturn...

The economy is "likely to continue deteriorating for the time being" and financial markets are expected to "remain under stress" in the foreseeable future, the BoJ warned in a statement.

The BoJ's latest announcement came a day after it said it would lend up to one trillion yen (10 billion US dollars) to commercial banks to cover risky debt.

US housing starts rise in February

Tuesday saw another good rally in the US stock market, helped by positive data on housing. From Bloomberg:

U.S. housing starts in February unexpectedly snapped the longest streak of declines in 18 years, raising optimism the market may be finally finding a floor.

Work began on 583,000 homes at an annual rate, a 22 percent increase from January that was propelled by a surge in condominiums, apartments and townhouses, Commerce Department figures in Washington showed today...

Building permits, a sign of future construction, rose less than starts, indicating construction may again slow...

Permits increased 3 percent to a 547,000 annual pace...

Producer prices also rose in February.

The Labor Department reported wholesale prices rose 0.1 percent in February as the cost of energy products, cigarettes, light trucks and household appliances increased.

The increase was less than forecast and followed a 0.8 percent advance in January. Excluding food and fuel, so-called core prices rose 0.2 percent.

The news from Europe also showed some improvement. From Bloomberg:

German investor confidence unexpectedly rose to the highest level in almost two years in March after the European Central Bank reduced borrowing costs to a record low.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations increased to minus 3.5 from minus 5.8 in February. That’s the highest reading since July 2007. Economists expected a drop to minus 8, according to the median of 39 forecasts in a Bloomberg News survey.

US industrial production falls, housing remains deep in recession

Fed chairman Ben Bernanke thinks that with successful government intervention, the US recession will probably end this year.

Monday's economic data don't suggest that the recession is ending soon, but it's still early in the year. Reuters reports the data.

The Federal Reserve said industrial production fell 1.4 percent last month, following a 1.9 percent drop in January. It was also worse than market expectations for a 1.1-percent decline.

Output slid 11.2 percent compared with February 2008, with the index at 99.7, the lowest reading since April 2002, the Fed said...

Industrial capacity utilization dropped to 70.9 February, matching a December 1982 record low for the series, which dates back to 1967, from 71.9 in January, the Fed said...

Separately, the New York Federal Reserve's Empire State factory index showed manufacturing activity in New York State slumped in March, dropping to a record low minus 38.23 in the month from February's minus 34.65...

Housing, which is at the center of the global economic and financial crisis, remains stuck deep in recession. The NAHB/Wells Fargo Housing Market index was flat at 9 in March, marking a fifth consecutive month of single-digit readings.

Less gloom for Japan

Amid all the gloomy reports on the Japanese economy, there are some hopeful signs that the sharp contraction seen over the past few months may be coming to an end, at least for the time being.

Some of the reports last week had shown how dreadful the economic contraction in Japan has been. The Cabinet Office reported that the economy contracted 3.2 percent in the fourth quarter, the sharpest contraction since 1974. The Ministry of Finance reported that exports plunged 46.3 percent in January from a year earlier, sending the current account into its first deficit in 13 years. The Ministry of Economy, Trade and Industry reported that industrial production fell 10.2 percent in January from the previous month, its biggest fall on record.

However, more timely indicators suggest that such sharp contractions may not persist in coming months.

At the end of last month, the Nomura/JMMA Japan Manufacturing Purchasing Managers Index was reported to have risen to 31.6 in February from a record low of 29.6 in January, indicating that the sharp plunge in manufacturing activity has come to an end, though not its contraction.

Last week, the Cabinet Office's economy watchers survey, a survey of people in economically-sensitive jobs, also showed improved numbers. The diffusion index for current conditions rose 2.3 points to 19.4 in February, the second consecutive month of increase. Even more impressively, the diffusion index for future conditions rose 4.4 points to 26.5, also the second consecutive month of increase, and taking the index well off its low of 17.6 in December.

Also last week, the Cabinet Office reported that consumer confidence improved in February. Its consumer confidence index rose to 26.7 last month from 26.4 in January, again the second consecutive rise in the index after it had fallen to 26.2 in December, the lowest since the government began compiling the figures in 1982.

And if the improvement in Japanese consumer confidence looked small, at least it was complemented by the report last week of a similar improvement in the United States. The Reuters/University of Michigan index of consumer sentiment rose to 56.6 in March from 56.3 in February. In addition, retail sales in the US declined just 0.1 percent in February after increasing 1.8 percent in January. A more resilient US consumer should help put a floor on plunging Japanese exports.

Of course, these are all very tentative signs of stabilisation in the economy. The stock market, for one, has shown little evidence of a return of bullishness, the Nikkei 225 stock market index actually touching a 26-year low at the beginning of last week before bouncing to finish the week up 5.5 percent.

Still, at least we can now look at the Japanese economy without the unmitigated gloom that has pervaded it for the past few months.

Global economic data show more gloom

Friday the 13th brought out some horror statistics on the global economy.

Japan's industrial production fell 10.2 percent in January from a month earlier, even worse than the preliminary estimate of a 10.0 percent drop.

Nevertheless there was actually good news coming out from Japan on Friday, relatively speaking anyway. From Bloomberg:

Japan’s consumer sentiment rose for a second month in February as slowing inflation provided some relief to households facing job losses and wage cuts.

The confidence index rose to 26.7 last month from 26.4 in January, the Cabinet Office said today in Tokyo. The index tumbled to 26.2 in December, the lowest since the government began compiling the figures in 1982.

Meanwhile, the eurozone economy is also suffering. From Bloomberg:

European retail sales fell for an eighth month in January as the global economic slump eroded consumer confidence and prompted households to curtail spending.

Sales in the euro region fell 2.2 percent from a year earlier after a 2.4 percent decline in December, the European Union’s statistics office in Luxembourg said today. Economists forecast a 2.3 percent fall, according to the median of 17 estimates in a Bloomberg survey. From the previous month, January sales were up 0.1 percent. A separate report showed labor-cost growth slowed to 3.8 percent in the fourth quarter...

... European car sales plunged 18 percent in February as demand for BMW, Opel and Mercedes-Benz models declined, the European Automobile Manufacturers’ Association said today.

Even resource-rich Canada is not escaping the global recession. From Bloomberg:

Canada’s recession is deepening, with reports today showing a record trade deficit amid vanishing automobile trade, and the highest unemployment rate since 2003.

The jobless rate rose to 7.7 percent in February from 7.2 percent as employers pared a net 82,600 workers, following January’s record decline of 129,000, Statistics Canada said today. The trade gap grew to C$993 million ($786 million), the largest since the agency began keeping records in 1971...

Exports fell 9 percent to C$31.7 billion in January, the lowest level since August 2003...

The slump in trade is worldwide. Bloomberg reports that US trade also suffered.

U.S. imports and exports both slumped for a sixth straight month in January in what may be the biggest collapse of world trade since the 1930s, raising the threat of protectionist measures to shield domestic industries.

The U.S. trade deficit narrowed in January to $36 billion, the lowest level in six years, on tumbling American demand for everything from OPEC oil to Japanese automobiles, Commerce Department figures showed today in Washington. The Labor Department said prices of imported goods dropped for a seventh month in February, another byproduct of the global recession...

Imports slumped 6.7 percent to $160.9 billion, the fewest since March 2005, paced by a $4.3 billion plunge in purchases of crude oil. Demand for foreign automobiles fell by $3.3 billion...

... Exports decreased 5.7 percent to $124.9 billion, the lowest level since September 2006, as sales of automobiles, semiconductors, telecommunications gear and drilling equipment dropped...

As in Japan, though, the good news is that consumer confidence did not fall.

The Reuters/University of Michigan preliminary index of consumer sentiment was at 56.6 in March, compared with 56.3 in February. The gauge reached 55.3 in November, the lowest level since 1980.

Germany faces worst slump since World War II

Thursday brought more negative economic reports.

Bloomberg reports that Germany faces its biggest economic slump since World War II.

Industrial production fell 7.5 percent in January from the previous month, the most on record, a report showed today...

Germany’s economy will shrink 3.7 percent this year, the Kiel-based IfW institute said today, lowering a prediction for a 2.7 percent contraction made in December. Germany’s worst post- war performance so far was a 0.9 percent contraction in 1975.

China's industrial production is also faltering, but bank lending rose sharply in February. Bloomberg reports.

China’s industrial-production growth slowed in the first two months of the year as exports slid at a record pace. Bank lending jumped as the nation’s 4 trillion ($585 billion) stimulus began to take effect.

Output rose 3.8 percent in January and February from a year earlier, slowing from a 5.7 percent increase in December, the statistics bureau said today. New lending quadrupled in February to 1.07 trillion yuan from a year earlier, the central bank said.

In Japan, the economy contracted in the fourth quarter but by less than previously estimated. AFP/CNA reports:

Japan's economy shrank slightly less than initially thought in the fourth quarter of 2008, but still logged its worst performance in almost 35 years as exports collapsed, data showed on Thursday.

The world's second-largest economy contracted 3.2 per cent in the three months to December or 12.1 per cent on an annualised basis, as the global downturn choked off demand for cars, high-tech goods and other exports.

Also less bad than expected were US retail sales. From Bloomberg:

Sales at U.S. retailers in February fell less than forecast and a gain in January exceeded the previous estimate, indicating the biggest part of the economy may be starting to stabilize...

Retail purchases decreased by 0.1 percent following a 1.8 percent jump in January, the Commerce Department said today in Washington. Excluding cars, sales climbed 0.7 percent. The Labor Department said more than 600,000 Americans filed jobless-benefit claims for a sixth straight week, the worst streak since 1982.

Overall, the global economic outlook remains dire and central banks are taking no chances, with several cutting interest rates recently, including New Zealand's and Switzerland's.

Global confidence falls

Bloomberg reports that confidence in the world economy dropped in March.

The Bloomberg Professional Global Confidence Index fell to 5.95 this month from 8.5 in February. A reading below 50 means pessimists outnumber optimists. Sentiment about Europe and the U.S. slid, while respondents in Asia were less pessimistic about their region, the survey showed.

Recent data justify the pessimism.

In China, the spectre of deflation is rising as consumer prices fell 1.6 percent in February over the previous year. Meanwhile, Chinese exports dived in February, as Reuters reports:

Exports in February slid 25.7 percent from a year earlier, dwarfing forecasts of a 5.0 percent fall, while imports dropped 24.1 percent, close to projections of a 25.0 percent decline.

The resulting trade surplus was just $4.84 billion, a three-year low, compared with $39.1 billion in January and a record $40.1 billion in November, the customs administration said. Markets had expected a figure of $27.3 billion.

But investment spending may help offset some of the external weakness.

Investment in urban areas in fixed assets such as roads, power plants and apartment buildings rose 26.5 percent in January and February from a year earlier, easily beating market forecasts of a 21.5 percent increase.

Meanwhile, though, the outlook for capital investment in neighbouring Japan does not look rosy. Bloomberg reports:

Orders for Japanese machinery fell for a fourth month in January, the longest losing streak in at least 20 years, as exports crashed and profits evaporated.

Bookings, an indicator of capital investment in the next three to six months, declined 3.2 percent from December, the Cabinet Office said today in Tokyo. The median estimate of economists surveyed was for a 4.8 percent drop.

And Japan also faces a deflation threat.

Producer prices, the costs companies pay for energy and raw materials, sank 1.1 percent in February from a year earlier, the biggest drop in more than five years, a central bank report today showed.

The other export powerhouse, Germany, also faces falling orders in manufacturing. From Bloomberg:

German manufacturing orders collapsed in January as the global recession smothered exports.

Orders plunged 38 percent from a year earlier, the biggest drop since data for a reunified Germany started in 1991, the Economy Ministry in Berlin said today. From December they fell 8 percent, four times as much as economists expected and extending their worst decline on record.

Stocks rally despite bleak economic news

Investors apparently felt much better about risk on Tuesday. Reuters reports:

The U.S. dollar slipped and world stocks rallied in their biggest single-day gain in three months on Tuesday after a Citigroup memo saying the troubled bank made a profit in January and February fueled the appetite for risk...

Gold fell more than 2.0 percent to below $900 an ounce while U.S. and euro zone government debt prices dropped as the rally in equity markets sapped any lingering safety bids...

MSCI's all-country world index jumped almost 5.0 percent, its biggest percentage gain in one session since a 5.7 percent rise on December 8.

Investors are now so focused on the banks that they largely ignored other negative signals on the economy.

The rally in stock markets came even as the International Monetary Fund warned that the world economy will likely contract in a "Great Recession" this year.

In further bleak news, European data suggested economic growth will contract sharply in the first quarter as France, Britain and Sweden reported precipitous falls in industrial output, and German exports dived.

But some would argue that stocks had fallen so much lately that they were due for a bounce anyway. Again from Reuters:

MSCI's all-country world index, a benchmark for major institutional investors, was trading just below 173 on Monday, roughly 2 percent above its October 2002 low of 169.48. If it falls below that, it will be at lows last seen 14 years ago in July 1995, before the Asian and Russian crises and when the internet bubble had barely begun...

World stocks as measured by MSCI have fallen 24 percent in roughly 2-1/2 months this year. It is already the second largest fall in the 22 years that the all-country world index has existed and more than half of last year's percentage loss of 43.5 percent. Mathematically, were it to keep losing at its current average rate of 22 points a month, the index would hit zero by year end.

Nikkei at 26-year low as Japanese current account goes into deficit

Asian stock markets kick off the week on a negative note. AFP/CNA reports:

Most Asian share markets dipped Monday on more glum news from Japan, where stocks hit a 26-year low on the announcement of the country's first current account deficit in more than a decade...

Japan's Nikkei stock index shed 1.21 per cent to close at its lowest level since October 1982. The benchmark has dropped 20 per cent so far in 2009, after a record 42 per cent slump last year.

More details on Japan's latest current account came from another AFP/CNA report.

Japan logged a bigger than expected deficit of 172.8 billion yen (1.8 billion dollars) in January in its current account, the broadest measure of trade in goods and services, according to official data.

Exports almost halved from a year earlier, reflecting the rapidly worsening global economic climate.

The deficit was the largest since comparable records began in January 1985 and marked a dramatic turnaround from the surplus of 1.164 trillion yen a year earlier.

The other Asian giant, China, isn't likely to do all that well either. Again from AFP/CNA:

China's economy is likely to slow further to 6.5 per cent in the first quarter, intensifying deflationary pressures, a government think tank said in a report published on Monday.

First-quarter economic growth will be slower than the 6.8 per cent seen in the fourth quarter of last year, the State Information Centre said in a report published in the official China Securities Journal.

The government think tank also forecast the consumer price index (CPI), the main gauge of inflation, would fall 1.0 per cent in the first quarter, compared with a rise of 1.0 per cent in January.

US economy loses 651,000 jobs in February

February saw another massive hit to US employment. Bloomberg reports:

The U.S. unemployment rate jumped in February to 8.1 percent, the highest level in more than a quarter century, a surge likely to send more Americans into bankruptcy and force further cutbacks in consumer spending.

Employers eliminated 651,000 jobs last month, the Labor Department said today in Washington. Losses have now exceeded 600,000 for three straight months, the first time that’s happened since the data began in 1939. Revisions to the previous two months lopped off an additional 161,000 positions.

The loss in February, however, was in line with expectations.

Payrolls were forecast to drop by 650,000, according to the median of 80 economists surveyed by Bloomberg News. The jobless rate was projected to jump to 7.9 percent. Forecasts ranged from 7.8 percent to 8.1 percent.

Indeed, stocks finished up for the day while Treasuries fell.

Treasuries fell, with 10-year notes yielding 2.87 percent at 4:16 p.m. in New York, compared with 2.81 percent late yesterday. The Standard & Poor’s 500 Stock Index reversed losses to end the day up 0.1 percent at 683.38.

ECB cuts, BoE moves to quantitative easing

The ECB cut interest rates by half a percentage point on Thursday, with possibly more to come. Bloomberg reports:

European Central Bank President Jean- Claude Trichet indicated officials will cut the benchmark interest rate further after reducing it to a record low of 1.5 percent today to combat a worsening recession.

“We didn’t decide ex-ante that this was the lowest point that we could attain,” Trichet said during a press conference in Frankfurt after the ECB lowered its main rate by half a percentage point. Policy makers still haven’t decided on using additional policy tools to stimulate growth, Trichet said.

The economy of the 16 euro nations is shrinking faster than the ECB expected just three months ago as the global slowdown curbs export demand and companies lay off workers. Trichet said today the central bank has cut its economic forecasts again and expects inflation to stay “well below” its 2 percent ceiling this year and next.

The BoE also cut interest rates by 50 basis points on Thursday and is moving to quantitative easing. Reuters reports:

The Bank of England pledged to go on a 75 billion pound bond-buying shopping spree on Thursday in an unprecedented attempt to get the recession-hit economy growing again as it also cut interest rates to new record low.

Governor Mervyn King said the rate cut to 0.5 percent, the sixth in as many months, would probably be the last and the central bank was now switching to injecting money directly into the economy by buying assets, mostly gilts.

Elsewhere on Thursday, interest rates were also cut in Denmark, which cut its benchmark rate by three quarters of a percentage point to 2.25 percent, and the Philippines, which cuts its benchmark rate by 25 basis points to 4.75 percent.

Stocks rise amid gloomy economic data

Chinese stocks surged on Wednesday, Bloomberg reports.

China’s stocks rose, driving the benchmark index to its biggest gain in four months, on speculation the government will announce new stimulus measures to revive the world’s third-largest economy...

The benchmark Shanghai Composite Index jumped 6.1 percent to 2,198.11 at the 3 p.m. local-time close. That’s the biggest gain since Nov. 10, when it climbed 7.2 percent after the government announced its 4 trillion yuan ($585 billion) spending plan. Only one stock dropped on the 896-member measure today.

The CSI 300 Index, which tracks shares on both the Shanghai and Shenzhen exchanges, rose 6.7 percent.

It was a good day for stocks around the rest of the world as well, although the economic data remained gloomy. Bloomberg reports Wednesday's economic reports from the US.

Service industries shrank further in February and companies stepped up staff cuts in the U.S., offering no sign the pace of the economy’s decline is abating.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, fell to 41.6 from 42.9 in January. Readings below 50 signal contraction. The ADP Employer Services survey showed employers cut a larger-than-projected 697,000 jobs last month...

The economy “deteriorated further” in almost all parts of the country over the last two months as consumer spending and manufacturing declined, the Federal Reserve said today in its regional economic survey. Lending fell across the entire country and credit “remained tight,” the report, known as the Beige Book, said.

The government, however, isn't standing idly by.

The Treasury today issued eligibility guidelines for homeowners seeking federal aid that will allow troubled borrowers to lower mortgage rates to as low as 2 percent. The rules require applicants to fully document their income with pay stubs and tax returns, and sign an affidavit attesting to “financial hardship,” the Treasury said.

Europe also saw weakness in its service industries. Bloomberg reports:

Europe’s services industries contracted at a record pace in February, pushing the economy deeper into its worst recession in more than a decade.

A gauge of activity fell to 39.2 from 42.2 in January. The index is based on a survey of purchasing managers by Markit Economics and a reading below 50 indicates contraction...

But the pace of decline in services eased in the UK. From Reuters:

The headline PMI activity index rose to 43.2 in February from 42.5 in January, better than analysts' expectations of a fall to 41.8 and above November's 40.1, the weakest result ever recorded in the series' 12-year history.

Meanwhile, central banks around the world continue to ease monetary policy, the latest being in Indonesia, where the key interest rate was cut by half a percentage point to 7.75 percent, and in India, where the repurchase rate was cut to a record low of 5 percent from 5.5 percent.

BoC cuts rates, RBA holds, Fed launches TALF

The Bank of Canada cut rates again on Tuesday. Reuters reports:

The Bank of Canada cut its main interest rate to a record low on Tuesday and signaled for the first time that it may take extra steps to pump money into a system that remains stubbornly short of credit.

The central bank reduced its key overnight rate by a half point to 0.5 percent, as expected, for a cumulative reduction of 400 basis points since December 2007.

Somewhat surprisingly, however, the Reserve Bank of Australia left interest rates unchanged. From Bloomberg on Tuesday:

The nation’s currency surged after Governor Glenn Stevens kept the overnight cash rate target at 3.25 percent in Sydney today...

“The Australian economy has not experienced the sort of large contraction seen elsewhere,” Stevens said in a statement. The bank’s rate cuts and government spending will provide “significant support” to the economy, he said.

A bold move and statement. Today from Bloomberg:

Australia’s economy unexpectedly shrank in the fourth quarter for the first time in eight years as exports and housing slumped, increasing pressure on the central bank to resume cutting interest rates.

Gross domestic product fell 0.5 percent from the third quarter, when it increased 0.1 percent, the Bureau of Statistics said in Sydney today. The median estimate of 23 economists surveyed by Bloomberg News was for 0.2 percent growth...

Traders forecast a 72 percent chance of a half-point reduction in the central bank’s benchmark rate when policy makers meet next on April 7, a Credit Suisse Index based on swaps trading showed at 1:36 p.m. in Sydney today.

In contrast, there has been no reluctance on the part of the Federal Reserve to cutting rates. In fact, it has gone well beyond rate cuts in fighting the credit crisis. On Tuesday, it launched the Term Asset-Backed Securities Loan Facility, the latest in a string of initiatives to alleviate the credit crunch. Bloomberg reports:

The Federal Reserve said its $1 trillion program to prop up the market for auto and business loans will start disbursing funds March 25 and will probably accept securities backed by vehicle-fleet and equipment leases.

The Fed also lowered interest rates and so-called collateral haircuts for loans tied to asset-backed securities with guarantees by the Small Business Administration or to government- guaranteed student loans, the central bank and U.S. Treasury said in a statement in Washington.

Stocks fall, manufacturing contracts

Stock markets around the world took a beating on Monday. Bloomberg reports:

Stocks slid worldwide, sending the Dow Jones Industrial Average below 7,000 for the first time since 1997, and Treasuries rose after Warren Buffett said the economy is in “shambles” and American International Group Inc. posted the largest corporate loss in U.S. history...

The Dow decreased 299.64 points, or 4.2 percent, to 6,763.29. The Standard & Poor’s 500 Index dropped 4.7 percent to 700.82, the lowest close since October 1996. Europe’s Dow Jones Stoxx 600 Index tumbled 5 percent, its steepest loss in three months. Nineteen stocks fell for each that gained on the New York Stock Exchange, making it the broadest decline in almost three weeks...

The MSCI World Index of stocks in 23 developed nations fell 4.9 percent to 713.94, the lowest closing level since the Iraq War began in March 2003. The MSCI Emerging Markets Index slid 5 percent, while Hungary’s forint dropped after European Union banks spurned aid pleas for eastern Europe.

Ironically, some of the economic data released on Monday were not as bad as expected. From Bloomberg:

The Institute for Supply Management’s factory index was 35.8, compared with 35.6 in January...

The median estimate of 67 economists surveyed by Bloomberg was for an ISM reading of 33.8...

The Commerce Department also reported consumer spending rose 0.6 percent in January after declining for a record six consecutive months.

Economists had forecast a 0.4 percent increase in spending, according to the median of 62 estimates in a Bloomberg News survey. The report showed the Fed’s preferred measure of inflation cooled in the 12 months ended January.

There were disappointments too, though.

Spending on construction projects fell 3.3 percent in January after a revised 2.4 percent drop the prior month that was larger than previously reported, Commerce also reported today. Private commercial projects slumped 4.3 percent, the most since January 1994.

And gloomy economic news pervaded the globe. From Bloomberg:

Canada’s economy contracted at the fastest pace since 1991 in the fourth quarter...

Gross domestic product fell at a 3.4 percent annualized rate to C$1.32 trillion ($1.02 trillion) in the October to December quarter, after 0.9 percent growth in the previous quarter...

Meanwhile, manufacturing in Europe continues to deteriorate. The BBC reports:

Manufacturing activity in the eurozone fell to its lowest level in 12 years in February, according to new figures.

The purchasing managers index (PMI), compiled by research group Markit, fell from 34.4 in the previous month to 33.5 - its lowest level on record...

Manufacturing activity in the UK fell to 34.7, down from 35.8 in January.

But Asia reported improved PMI numbers. From Bloomberg:

China’s manufacturing shrank for a seventh month in February as the global financial crisis cut exports and growth across Asia.

The CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 45.1 from 42.2 in January, CLSA Asia-Pacific Markets said today in an e-mailed statement...

And last week, Japan reported that its manufacturing PMI rose for the first time in seven months to 31.6 in February from 29.6 in January.

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.