1.2 World Economic Performance in Q4/2008 and in the whole year of 2008.
The world economy in the fourth quarter noticeably slowed down due to the economic contraction in major industrialized countries and export dependence countries especially in Asia. Emerging and developing economies drastically slowed down. The value of trades and industrial production entered contracting condition.
In the fourth quarter, the US financial crisis has severely deteriorating, as credit crunch occurred widely. Economy of major industrial countries were in the contracting condition, unemployment rate increased, housing and security prices have declined continuously, domestic demand has consequently contracted responding to the situation of credit crunch and wealth destruction. Bankruptcy of financial institutions and lack of the world economic confidence caused security index in all region to fall and raised cost of funding in the global financial market. The contraction of demand in industrialized countries caused export to decline in other countries, which tended to deteriorate further in 2009. This situation caused other developed and Newly Industrialized countries such as Japan, Canada, South Korean and Singapore to enter contraction condition. Furthermore, economic growth of developing and emerging countries slowed down sharply. All in all, global economy in the year 2008 registered a growth rate of only 2.8 percent, compare to 5.0 percent in the year 2007.
The drastic slow down of global economy in the last quarter of 2008 caused the global trade and global manufacturing production to decline, and decelerated world trade volume expansion to only 4.1 percent, the tremendous slow down comparing to 7.2 percent in 2007. However the deteriorating economic condition that tended to be more severe in 2009 caused several countries to lower their policy rate. The US, Eurozone, UK, Japan, Canada, cut their interest rate down to record low. Meanwhile the risk of deflation had increasingly intensified as inflation pressure declined. Therefore, major industrialized countries increasingly turned its monetary policy to credit easing and deployed fiscal deficit policy for economic stimulation. Likewise, developing countries increasingly employed fiscal deficit policy to stimulate domestic demand for compensation of export demand reduction. In the fourth quarter of 2008, the performances of main economies are summarized as follows.
- The US economy contracted for two consecutive quarters with more drastically in Q4. In the third quarter, the US economy contracted by 0.2 percent compare to the same period of last and 3.8 percent compare to previous quarter, which was the contraction of two consecutive quarters . Private consumption contracted by 1.3 percent while investment contracted by 7.5 (yoy). The drastic economic contraction caused the economic growth rate for the whole 2008 to decelerate to 1.3 percent, from 2 percent in 2007. The latest key economic indicator pointed to a further deterioration in 2009. Industrial ISM index in December declined to 32.9, the lowest level in 26 years; Consumer confidence index in January 2009 continuously decreased to 37.7, the lowest level since 1977. Unemployment rate increased to 7.6 percent in January. Non-farm payroll dived 577,000 in December 2008 and 598,000 in January 2009. Job losses and mass lay off occurred in service, industrial production and construction sectors. The strong increase in unemployment rate tended to generate a roll back effect that aggravates condition in real estate and credit markets which will be obstacles to economic recovery. Although Fed cut its policy rate to as low as 0-0.25 percent, credit market has not yet improved adequately and counterparty risk remained high. Meanwhile, the risk of deflation increased due to severe demand contraction and commodity prices reduction in the world market. Under this circumstance, Fed turned its monetary policy to balance sheet expansion in order to reduce cost of funding and to increase credit accessibility of public and private sectors, as well as to extend credit to insolvency financial institutions and to nationalize troubled financial institutions. Moreover, US government announced Troubled Asset Relief Program (TARP) worth 700 billion USD,(equivalent to 24,500 billion baths) to help illiquid debtors and financial institutions as well as automobile industry. In addition, the US announced economic stimulus package with total value of 787 billion USD.
- The Euro Zone Economy contracted for three consecutive quarters. In the fourth quarter of 2008, Euro Zone economy contracted by 1.5 percent from previous quarter and 1.2 percent compare to the same period last year. This pulled down the Eurozone economic expansion for the whole year of 2008 to 0.7 percent, down from 3 percent in 2008. Eurozone economy was severely affected by the current global financial crisis due to its large-scale exposure to the US economy particularly in trade sector. As a result, manufacturing production had declined substantially as evidence in the reduction of PMI index from 52.1 in the first quarter of 2008 to 40.2 in the fourth quarter. Likewise, industrial production index in the fourth quarter declined by 3.4 percent. Unemployment rate picked up from 7.2 percent in the first quarter to 7.9 percent in the fourth quarter while exports fell across all countries in particular in the countries where the US is key trading partner. In the fourth quarter, exports dropped by 4.8 percent (yoy). Additionally, several financial institutions in the region have been facing with liquidity problem and prone to bankruptcy conditions that are stemmed from US financial crisis.
- The UK Economy contracted by 1.5 percent (qoq) in the fourth quarter and drove the UK economy to a full-fledged recession for the first time in 18 years. The general economic conditions in the UK are akin to that of the US economy, which are the continues reduction in housing prices and slump in real estate market as well as credit contraction and high debt level both on household and business balance sheets. Financial sector which is accounted for 30 percent of GDP was severely affected by financial crisis. Meanwhile manufacturing sector shrank 4.6 percent in the fourth quarter consistent with the decrease of purchasing manager index in December to 34.4 which equivalent to 7.4 percent contraction from the same period of 2007.and construction production index in December fell to 29.3, the lowest level since 1992. The sharp economic contraction raise the number claims for unemployment compensation which escalated by 77,900 people in December, totaling to 336,000 people for the whole year of 2008. Under this circumstance, the central bank lowered its policy rate to 1.0 percent. Moreover, the UK government has prepared to establish a loan guarantee fund for small and medium enterprises worth 21.3 billion pounds, and announced stimulus package worth 30.8 million US dollars.
- The Japanese Economy severely affected by global financial crisis that turned the economy in 2008 into recession. In the fourth quarter, the Japanese economy contracted by 3.3 percent from previous quarter and 4.6 percent from the same period last year. This is a strongest contraction in 30 years and is a three quarters consecutive contraction that turned the GDP growth rate for the whole year of 2008 to a negative rate of 0.7 percent. The contraction of the Japanese economy was mainly attributable to a decline in exports by 12.9 percent from the same period last year while imports increased by 3.0 percent. Domestic demand continued to decline as indicated by a reduction of retail sales of 1.5 percent in the fourth quarter. Recent economic indicators pointed to a further severe economic contraction as exports in December fell by 35 percent (yoy) and imports dropped by 21 percent. Consumer confidence index fell sharply to 26.7, its historically lowest level since 1875. The demand contraction in both domestic and oversea market badly affected Japan’s manufacturing sector as illustrated by a 20.0 percent contraction of industrial production index in December, the strongest reduction since 1970. However, unemployment rate in the forth quarter was at 3.9 percent; relatively stable compare to 4 percent in previous quarter.
- The Chinese Economy grew only by 6.8 percent in the fourth quarter, the slowest pace since the fourth quarter of 2001 and resulted in 9.0 percent GDP expansion for the whole year of 2008. Global economic slowdown severely affected the Chinese trade sector as seen in the reduction of exports of 17.5 percent (yoy) in December. The sharp export reduction lowered manufacturing and investment. The manufacturing Purchasing Managers’ Index (PMI) fell from 53.1 in January to 41.2 and 38.8 percent in November and December respectively while foreign direct investments in December dropped by 5.7 percent (yoy) which equivalent to 5.98 billion USD. In January 2009, foreign direct investment dropped further at a faster pace of 33 percent in January. Under the circumstances of severe economic slowdown, the Chinese government announced a policy package to stimulate the economy worth 586 billion USD that encompassed housing projects for low-income, infrastructure constructions in rural areas, development of transportation systems, development of education and public health systems for low-income people, environmental projects, development of industrial technology and Sichuan postearthquake reconstruction. Meanwhile, people bank of China cut its policy rate from 5.31 percent to 2.16 percent.
- The Indian Economy is forecasted to grow by 4.9 percent in the fourth quarter (yoy), slow down from 7.3 percent in previous quarter which will pull down the economic growth rate for the whole year of 2008 to 7.3 percent. Current economic crisis severely affected India’s export and industrial sectors as seen in continues contraction of export volume since the beginning of the third quarter (12.1 percent, 9.9 percent and 1.1 percent in October, November and December, respectively). Since labor-intensive production is accounted for around 50 percent of total exports, the contraction of exports directly affected labor market. In particular, industries such as textiles, leather, gems and jewelry have seriously affected, triggering a mass lay-off. To stimulate the economy, the Indian government stimulus measures worth 60 billion USD, focusing on providing assistance to major industries and infrastructure development. In addition, the VAT rate was lowered from 8 percent to 4 percent while central bank lowered policy rate from 9 percent to 5.5 percent, and launched supporting measure to business sector, in particular SMEs, by providing low interest rate loans.
- The NIEs countries turned to economic recession. Economic downturn in major export destination countries like US, EU, UK and Japan severely affected Newly Industrialized
Economies (NIEs ). Export values that started to decline in October (and more severe reduction in November and December) badly affected NIEs as these economies are highly export-dependent economies with a very high share of manufacturing in total production. Industrial production substantially declined in November and December which resulted in 3.4 percent, 3.7 percent, and 8.36 percent GDP contraction in the third quarter for South Korea, Singapore and Taiwan respectively and lowered their whole year growth rate to 2.5, 1.2 and 0.12 percent respectively. In addition, the latest economic indicators in January 2009 suggested that the impacts on export will become more severe as indicated by stronger export contraction of 32.1 and 42.9 percent for South Korea and Taiwan respectively.
- The ASEAN economies sharply decelerated. Global economic downturn has its strong impacts on the export of ASEAN countries. In the fourth quarter, export of Indonesia, Malaysia and the Philippines contracted by 13.8, 0.3 and 19.0 percent respectively. Furthermore, Vietnam’s export value slowed down to 6.4 percent compared to 45.0 percent in the third quarter. This contraction in export caused a severe impact on manufacturing production of AEAN countries. Indonesia and the Philippines’ manufacturing products grew sluggishly by 1.96 and 1.35 percent respectively in November compared to that of 6.0 and 9.23 percent in October while Malaysia’s manufacturing products contracted by 15.54 percent in December. The reduction in production and export had severe impact over employment and domestic demand. In the fourth quarter, the Philippines and Indonesia’s economy expanded by 5.6 and 5.7 percent; with annual expansion of 4.6 and 6.0 percent. Malaysia and Vietnam expected to grew by 1.9 and 5.6 percent in the fourth quarter; consequently the economies in 2008 would expanded by 5.3 and 6.3 percent respectively. Under the circumstance, Malaysia, Vietnam and Indonesia government had announced policy package to stimulate economy worth 2, 5.7 and 4.5 billion US dollars. While, central banks of Malaysia, the Philippines, Vietnam and Indonesia lowered their policy rate to 2.5, 5, 7 and 8.5 percent respectively.