Monday, May 5, 2008

Global Slowdown Continues

Slowdown continues across the globe.Q2 likely to be much worse. Layoffs are on the rise. Auto sector likely to go the housing way. US Govt's stimulus package not expected to have much impact. The 0.6% GDP growth and some other positive upticks hide the underlying weaknesses which are likely to unwind in coming quarters.

Food price on the rise primarily on supply side concerns and Oil prices moving like a pendulum on speculative positions

Japan slowing down due to export dependency on US. In Europe, UK and Germany going the US way. China growth already expected to be lower.

India still following US with a 6 month lag thought the impact might not be as severe. Dependency on exports to US, Europe and China will take a toll. Matters will get worse since India is dependent on import of food, oil and coal. The revised GDP numbers at 7% to 8% levels (down from 8 to 9% levels) seem optimistic. Food prices hurting common man. Fuel price bubble will burst anytime taking a severe toll of the economy.

Here are some key news excerpts capturing the latest developments to the global economy along with my comments


  • As per Prof Roubini, “ The headline +0.6% hides a fall in real final sales of domestic product as a build-up of inventories of unsold homes added 0.8% to GDP; the payback will come in Q2 as unsold inventories are unwound. In Q4 GDP growth was also 0.6% but final sales growth was a strong 2.4% and a run down of inventory of 1.8% subtracted that much to GDP. So with final sales growth slowing from +2.4% or a -0.2% the collapse in final demand in Q1 is extremely sharp. We were already in a recession in Q1 that will get much worse in Q2.”
  • Warren Buffet says “ We're in a recession,. But this is an awfully pale recession at the moment. The declines in employment have not been as big as you'd expect to see.'' ``Until there are stabilized prices of homes, and I think they have a good way to go down, you still have prospective losses'' for financial companies and investors. ``It's too soon to tell'' if the worst of the credit crunch is over”.
  • Home prices drop by 12.7% in the 12 months ending February. Foreclosures up by 112% in the first quarter.
  • Auto sector bubble : Auto sales are showing a sharp fall and auto loan delinquency have hit a 17-year high in the fourth quarter of 2007. Auto sector too is showing 'negative equity' as in housing sector.
  • Employers cut 20,000 jobs from their payrolls in April, surprising economists who were expecting a bigger deficit of 75,000. Employers cut 81,000 jobs the previous month. The unemployment rate, generated by a separate survey, fell to 5% from 5.1% in the previous month. Economists thought it would rise to 5.2%, on average. This is however a false lull and driven by large jump, by 306,000, in the number of people who were working part-time who wanted full-time positions
  • Stimulus package unlikely to be effective in boosting up spending. Two reasons :- people more likely to pay up expensive debts, and secondly in any case the amounts are not sufficient to provide any significant boost.
  • As per Institute for Supply Management, its non-manufacturing index was 52.0 in April versus 49.6 in March. This was the biggest improvement in seven months. However this is more a short term cycle playing out and the trend likely to reverse soon.
  • Federal prosecutors in New York have formed a task force together with other government agencies to examine the collapse of the market for risky home loans. Expect more skeletons tumbling out of the closet.
  • Layoffs continue in financial sector. Morgan Stanley is planning to layoff another 1500 employees.


Japan's factory production fell at the fastest pace in at least five years in March. The U.S. slowdown is beginning to take a toll on Japan's exports, one of the main drivers of growth in the world's second-largest economy.


  • Current inflation is due to supply-side not demand-side factors. Monetary/fiscal measures may have limited/lagged impact. Fiscal/trade deficit likely to increase significantly.
  • Earnings and profits of tech companies hit on U.S. Slowdown. Going forward effect likely to be mixed. New deals / clients might not come about, however existing clients likely to outsource more in second half of 2008.


Oil futures have have now crossed $120 a barrel on news of supply threats and dollar weakening. Seems to be driven more by speculation.


As per a McKinsey study, more than 10m Germans could fall into poverty by 2020 because of insufficient economic growth.

Food Inflation

Oman is to buy 200,000 tons of rice, enough to build a two-year stockpile, as it seeks to ease the inflationary burden on its population. If more countries start stockpiling food stuff, the impact on food inflation would be severe.