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Commentary :: Economy
The Domino Recession
The greatest risks threaten through the crisis of the financial system, through further price increases for food, the sensitivity of global supply routes and the increasingly expensive sources of energy. 2008 could develop into a worldwide crisis year.
THE DOMINO RECESSION
The signs in the US and beyond point to recession. Reports on the world economy are not optimistic
By Ralf Streck
[This article published in the German-English cyber journal Telepolis, 1/16/2008 is translated from the German on the World Wide Web, www.heise.de/tp/r4/artikel/27/27076/1.html.]
The 2008 Global Risk Report [1] presented by leading financial firms concluded that a recession threatens in the US, the largest individual economy. The risks are assessed on a five-point scale in a poll of 100 leading entrepreneurs, politicians and economists. The greatest risks threaten through the crisis of the financial system, through further price increases for food, the sensitivity of global supply routes and the increasingly expensive sources of energy. These four risk complexes serve as a basis for the 2008 meeting of the World Economic Forum [2] in Davos.
Political and economic uncertainties are at the highest level in a decade. 2008 could develop into a worldwide crisis year. The prices for real estate in the US will probably continue to fall. This is also true for Great Britain and other European states where speculative bubbles have developed on the real estate market [3]. A general consumer decline and recession threaten, the report says. The likelihood of a decline of GDP growth in China is estimated at 3.5 points that could cost the world economy up to a trillion dollars.
The experts see the same likelihood in a “sudden and serious fall of the dollar’s value with corresponding consequences for the (global) financial system.” The weakening of the US economy could also damage Russia since the weak dollar will also affect raw material prices. The faltering Chinese economy could also affect Russia’s economy.
The report warns of a grievous food shortage which is described as one of the greatest risks of the 21st century. The growing world population, higher standard of living, increased production of so-called bio-spirit [4] and climate change are made responsible for the food shortage. The compulsory optimism has obviously disappeared with their own massive write-offs for businesses like the US Citigroup Bank or the Swiss insurer Swiss Re [5] that collaborated in the report.
The largest US banks had to write off $18 billion and posted a quarterly loss of $9.83 billion [6]. Since it was the first US bank to present data for the fourth quarter of 2007, more horror news may follow. For Citigroup, payment losses in US consumer credits amounted to $4.1 billion; its revenues fell 70%. These numbers suggest recession to Citigroup. As expected, the financial crisis has long left [7] the subprime market [8] and moved to the private credit card market. Banks have increased their transfers after losses in the business rose a third by the end of September 2007. Banking is a market with an estimated $900 billion and strikes the nerve of the US consumer culture. In the second and third quarters of 2007, the economic output in the US shriveled around one percent compared to 2006. The specialists of Goldman Sachs predict a recession. Measured by gross domestic product (GDP), economic output has fallen in two successive quarters. For the former Federal Reserve chief Alan Greenspan who warned of this scenario in 2007 [9], the recession is imminent if the US isn’t already entangled in it. “The symptoms are all very clear,” he said in an interview [10]. Previously he pointed to the nightmare of a stagflation. Goldman Sachs sees a recession danger for Japan, the second largest economy. The probability for this is around 50 percent, the experts said in early January 2008 in Tokyo.
CRISIS IN GREAT BRITAIN AND SPAIN
Dangers also threaten in Great Britain and Spain where real estate deals occurred in the last years. Real estate prices are falling in both countries. While prices fell slowly in Spain, they have skidded intensely in Great Britain reaching their lowest level since the recession at the beginning of the 1990s [11].
The problems in the mortgage market are already breaking through the credit card sector. In Great Britain, the volume of real estate credits has risen to more than a billion pounds. Indebtedness is twice as high as in the Euro realm. Its central bank may not always urge lower interests. The interest level at 5.5 percent is clearly above the level in the Euro realm. In the past, its central bank unlike the European Central Bank (EZB) refused to make economic policy. It justified its policy arguing inflation was clearly above the desired 2% and lower than the 3.1 percent in the Euro space on the yearly average.
The experts have also abandoned their compulsory optimism for Spain. The Swiss UBS bank also shaken by the US credit crisis pains a gloomy picture for its situation [12]. Merrill Lynch and others [13] say the crisis already has a stranglehold on the country – even if the government does not want to admit this before the March elections.
The inflation rate of 4.2 percent in 2007 causes great alarm [14]. For months, the unemployment numbers have risen because the construction sector collapses in view of the high indebtedness and the soaring interests. Even the government now admits 350,000 jobs were lost in construction [15].
WORLDWIDE RECESSION
The United Nations already sees signs for a recession on a world scale. There are clear and present signs that the growth of the world economy is grinding to a halt according to the UN’s annual report on global economic development [16]. The report identifies similar risks like the Global Risk Report. Worldwide growth will be significantly lower when these risks materialize. Then the crisis on the real estate and mortgage markets will turn out to be much more serious and will be accompanied by a fast and deep nosedive of the dollar.” This will lead to the decline of worldwide growth around 1.6 percent for 2008.
The adjustment of markets to these dangers can be seen in the high price of gold since investors seek secure assets. In January 2008, the price of gold set a new record at $911.10. On Friday, the gold price climbed above the mark of $900 for the first time in history. Silver and platinum are also increasing their value. The anxiety of investors is also clear in the flight to more secure state bonds.
Links
(1) www.weforum.org/pdf/globalrisk/report2008.pdf
(2) www.weforum.org/en/events/AnnualMeeting2008/index.htm
(3) www.heise.de/tp/r4/artikel/24/24865/1.html
(4) www.heise.de/tp/r4/artikel/26/26546/1.html
(5) www.heise.de/tp/r4/artikel/26/26866/1.html
(6) www.nzz.ch/nachrichten/medien/us-bank_citigroup_muss_nochmals_18_milliarden_abschreiben_1.651803.html
(7) www.heise.de/tp/r4/artikel/25/25616/1.html
(8) www.heise.de/tp/r4/artikel/25/25931/1.html
(9) www.heise.de/tp/r4/artikel/24/24865/1.html
(10) online.wsj.com/article/SB120036887435090605.html
(11) property.timesonline.co.uk/tol/business/economics/article3193239.ece
(12) www.elpais.com/articulo/economia/banco/suizo/UBS/dibuja/negro/escenario/proximos/anos/Espana/elpepueco/20080109elpepueco_12/Tes
(13) www.elpais.com/articulo/economia/Financial/Times/afirma/crisis/ha/estrangulado/Espana/elpepueco/20080109elpepueco_9/Tes
(14) www.elpais.com/articulo/economia/inflacion/cierra/2007/42/carestia/petroleo/alimentos/elpepueco/20080115elpepueco_1/Tes
(15) www.elmundo.es/mundodinero/2008/01/16/economia/1200468740.html).
(16) www.un.org/esa/policy/wess/wesp.html
Telepolis Artikel-URL: www.heise.de/tp/r4/artikel/27/27076/1.html
The signs in the US and beyond point to recession. Reports on the world economy are not optimistic
By Ralf Streck
[This article published in the German-English cyber journal Telepolis, 1/16/2008 is translated from the German on the World Wide Web, www.heise.de/tp/r4/artikel/27/27076/1.html.]
The 2008 Global Risk Report [1] presented by leading financial firms concluded that a recession threatens in the US, the largest individual economy. The risks are assessed on a five-point scale in a poll of 100 leading entrepreneurs, politicians and economists. The greatest risks threaten through the crisis of the financial system, through further price increases for food, the sensitivity of global supply routes and the increasingly expensive sources of energy. These four risk complexes serve as a basis for the 2008 meeting of the World Economic Forum [2] in Davos.
Political and economic uncertainties are at the highest level in a decade. 2008 could develop into a worldwide crisis year. The prices for real estate in the US will probably continue to fall. This is also true for Great Britain and other European states where speculative bubbles have developed on the real estate market [3]. A general consumer decline and recession threaten, the report says. The likelihood of a decline of GDP growth in China is estimated at 3.5 points that could cost the world economy up to a trillion dollars.
The experts see the same likelihood in a “sudden and serious fall of the dollar’s value with corresponding consequences for the (global) financial system.” The weakening of the US economy could also damage Russia since the weak dollar will also affect raw material prices. The faltering Chinese economy could also affect Russia’s economy.
The report warns of a grievous food shortage which is described as one of the greatest risks of the 21st century. The growing world population, higher standard of living, increased production of so-called bio-spirit [4] and climate change are made responsible for the food shortage. The compulsory optimism has obviously disappeared with their own massive write-offs for businesses like the US Citigroup Bank or the Swiss insurer Swiss Re [5] that collaborated in the report.
The largest US banks had to write off $18 billion and posted a quarterly loss of $9.83 billion [6]. Since it was the first US bank to present data for the fourth quarter of 2007, more horror news may follow. For Citigroup, payment losses in US consumer credits amounted to $4.1 billion; its revenues fell 70%. These numbers suggest recession to Citigroup. As expected, the financial crisis has long left [7] the subprime market [8] and moved to the private credit card market. Banks have increased their transfers after losses in the business rose a third by the end of September 2007. Banking is a market with an estimated $900 billion and strikes the nerve of the US consumer culture. In the second and third quarters of 2007, the economic output in the US shriveled around one percent compared to 2006. The specialists of Goldman Sachs predict a recession. Measured by gross domestic product (GDP), economic output has fallen in two successive quarters. For the former Federal Reserve chief Alan Greenspan who warned of this scenario in 2007 [9], the recession is imminent if the US isn’t already entangled in it. “The symptoms are all very clear,” he said in an interview [10]. Previously he pointed to the nightmare of a stagflation. Goldman Sachs sees a recession danger for Japan, the second largest economy. The probability for this is around 50 percent, the experts said in early January 2008 in Tokyo.
CRISIS IN GREAT BRITAIN AND SPAIN
Dangers also threaten in Great Britain and Spain where real estate deals occurred in the last years. Real estate prices are falling in both countries. While prices fell slowly in Spain, they have skidded intensely in Great Britain reaching their lowest level since the recession at the beginning of the 1990s [11].
The problems in the mortgage market are already breaking through the credit card sector. In Great Britain, the volume of real estate credits has risen to more than a billion pounds. Indebtedness is twice as high as in the Euro realm. Its central bank may not always urge lower interests. The interest level at 5.5 percent is clearly above the level in the Euro realm. In the past, its central bank unlike the European Central Bank (EZB) refused to make economic policy. It justified its policy arguing inflation was clearly above the desired 2% and lower than the 3.1 percent in the Euro space on the yearly average.
The experts have also abandoned their compulsory optimism for Spain. The Swiss UBS bank also shaken by the US credit crisis pains a gloomy picture for its situation [12]. Merrill Lynch and others [13] say the crisis already has a stranglehold on the country – even if the government does not want to admit this before the March elections.
The inflation rate of 4.2 percent in 2007 causes great alarm [14]. For months, the unemployment numbers have risen because the construction sector collapses in view of the high indebtedness and the soaring interests. Even the government now admits 350,000 jobs were lost in construction [15].
WORLDWIDE RECESSION
The United Nations already sees signs for a recession on a world scale. There are clear and present signs that the growth of the world economy is grinding to a halt according to the UN’s annual report on global economic development [16]. The report identifies similar risks like the Global Risk Report. Worldwide growth will be significantly lower when these risks materialize. Then the crisis on the real estate and mortgage markets will turn out to be much more serious and will be accompanied by a fast and deep nosedive of the dollar.” This will lead to the decline of worldwide growth around 1.6 percent for 2008.
The adjustment of markets to these dangers can be seen in the high price of gold since investors seek secure assets. In January 2008, the price of gold set a new record at $911.10. On Friday, the gold price climbed above the mark of $900 for the first time in history. Silver and platinum are also increasing their value. The anxiety of investors is also clear in the flight to more secure state bonds.
Links
(1) www.weforum.org/pdf/globalrisk/report2008.pdf
(2) www.weforum.org/en/events/AnnualMeeting2008/index.htm
(3) www.heise.de/tp/r4/artikel/24/24865/1.html
(4) www.heise.de/tp/r4/artikel/26/26546/1.html
(5) www.heise.de/tp/r4/artikel/26/26866/1.html
(6) www.nzz.ch/nachrichten/medien/us-bank_citigroup_muss_nochmals_18_milliarden_abschreiben_1.651803.html
(7) www.heise.de/tp/r4/artikel/25/25616/1.html
(8) www.heise.de/tp/r4/artikel/25/25931/1.html
(9) www.heise.de/tp/r4/artikel/24/24865/1.html
(10) online.wsj.com/article/SB120036887435090605.html
(11) property.timesonline.co.uk/tol/business/economics/article3193239.ece
(12) www.elpais.com/articulo/economia/banco/suizo/UBS/dibuja/negro/escenario/proximos/anos/Espana/elpepueco/20080109elpepueco_12/Tes
(13) www.elpais.com/articulo/economia/Financial/Times/afirma/crisis/ha/estrangulado/Espana/elpepueco/20080109elpepueco_9/Tes
(14) www.elpais.com/articulo/economia/inflacion/cierra/2007/42/carestia/petroleo/alimentos/elpepueco/20080115elpepueco_1/Tes
(15) www.elmundo.es/mundodinero/2008/01/16/economia/1200468740.html).
(16) www.un.org/esa/policy/wess/wesp.html
Telepolis Artikel-URL: www.heise.de/tp/r4/artikel/27/27076/1.html
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