AUSTRALIA’S export credit agency EFIC has identified some startling highlights in its March World Risk Developments newsletter.
According to EFIC: Eastern Europe is looking crisis prone; the Japanese economy has had its largest single quarter contraction since the 1974 oil shock; and two scenarios for the world economy are in contention – one suggesting a two-year climb-back to trend growth; the other, a more prolonged slog as households and financial service firms de-gear.
EFIC chief economist Roger Donnelly, says the most vulnerable countries in Eastern Europe and the former Soviet Union – including the Baltic states, Bulgaria, Romania, and the Ukraine – look distinctly crisis-prone.
“Growth in Eastern Europe and Russia turned around from a 5 per cent annualised rate in Q3 2008 to around -8 per cent in Q4. It looks quite possible that all Eastern European countries will experience full-year contractions in 2009,” he says.
The slump in the west is undermining Eastern European exports, while Western European banks’ waning enthusiasm for refinancing foreign currency loans is triggering sharp currency depreciations.
In the other direction, the exposure of Western European banks to the troubled east is intensifying the credit crunch in the west.
“There are concerns that some Western European banks will withdraw support from their Eastern European subsidiaries, further weakening Eastern European currencies and banking systems, thereby causing additional ricochet effects,” says Donnelly.
Recent data also points to sharp contractions in trade, industrial production and GDP in Q4 2008, even in East Asia, which was supposed to be able to defy the international downturn.
“Pre-collapse, it made sense to speak of ‘decoupling’, with emerging economies outgrowing by a considerable margin advanced ones. But in Q4 2008, advanced and emerging economies alike seem to have contracted. ‘Recoupling’ and ‘synchronicity’ have become the new watchwords,” says Donnelly.
Among advanced economies, the largest contractions in Q4 occurred in Singapore, which dropped at a 17 per cent annualised pace, the biggest in its history, and Japan at a 13 per cent rate. For Japan, this is the fastest pace since the recession of 1974, which was triggered by the first OPEC oil shock.
“The Japanese slump represents a big drag on world economic activity, because Japan, as the world’s second largest economy, constitutes 8 per cent of world GDP,” says Donnelly.
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