International Economic Update

First Quarter Sees Continued Sharp Declines
July 2, 2009

With few exceptions, nations reported continued declines in GDP in the first quarter. The GDPs of the U.K., the euro zone and Japan contracted at a faster rate than in the United States (Table 1). Especially sharp was the nearly 9 percent contraction in Japan from first quarter 2008. Among the euro countries, Germany has been hardest hit, with exports dropping 29 percent since last year and GDP dropping nearly 7 percent since first quarter 2008.

The slowdown was felt in the developing world as well. China and India continued to grow but at slower rates. Brazil's GDP has now contracted slightly, and Russia and Mexico contracted sharply. The magnitude of the Russian economic downturn was particularly sudden: GDP growth had been slightly negative, only to drop an annualized 36 percent in first quarter 2009.

Table 1
GDP Growth in First Quarter 2009

Compared with same period 2008 Compared with Q4 of 2008 (annualized)
The Americas
U.S. –2.5 –5.6
Canada –2.1 –5.5
Mexico –8.6 –23.5
Brazil –1.6 –3.3
Europe
Euro zone –4.8 –10.1
U.K. –4.1 –7.6
Russia –9.7 –36.1
Asia
Japan –8.4 –15.0
China 6.1 n.a.
India 5.7 6.4
Korea –4.3 .5

SOURCE: National statistical offices.

World's Regions Diverge

Signs show that the world's economies have begun to diverge. Industrial production has picked up in much of Asia, while there is little evidence of recovery in the rest of the world (Charts 1 and 2). The U.S., Canada and Mexico have continued to decline, as has the euro zone. The one non-Asian exception is Brazil, which has seen industrial production increase since December. Eastern Europe, which was hit particularly hard in the first quarter, does not seem to be improving.

After bottoming out in February, industrial production has increased sharply in Korea and Taiwan and, in more recent months, even in Japan.

For industrial production in Eastern Europe, the rate of descent may have slowed, but there is no clear evidence that a turnaround has begun. In April, industrial production continued to move downward. The Baltic countries (Estonia, Latvia and Lithuania) have been heavily affected by the crisis, recording first-quarter GDP drops of over 10 percent.

In the wake of the crisis, several Eastern European countries have turned to the International Monetary Fund (IMF) for emergency lines of credit. These countries have borrowed $27 billion from the IMF and have credit lines available for another $33 billion.

Activity Returning to Normal in China?

China also shows signs that its growth slowdown is ending (Chart 3). The Purchasing Managers Index is a survey that indicates whether manufacturing activity increased in that month; any value above 50 percent indicates expansion. The index as a whole and its individual components (such as new orders, output, exports, and imports) have increased sharply and now indicate expansion. After bottoming out in February, both imports and exports between China and its major trading partners (including the U.S). have picked up. This reversal may be the result of the Chinese government's large stimulus package (12 percent of GDP).

Monetary Policy Remains Expansionary

In the wake of unprecedented economic distress, the world's central banks have kept monetary policy stimulative. The Bank of Japan and Bank of England have kept their policy rates at 0.1 percent and 0.5 percent, respectively. The European Central Bank (ECB) has cut its policy rate to 1 percent. It has also announced a program to buy 60 billion euros of covered bonds, which are bank bonds that are collateralized by other debt (such as mortgages or government debt).

The ECB has implemented a new program to lend 422 billion euros to banks through its refinancing facility for one year. Prior to the introduction of this program, European banks had become less reliant on the ECB, with usage of the three-month refinancing facility dropping 30 percent since January to 429 billion euros. Deposits by banks at the ECB dropped from 300 billion euros in January to 20 billion at the end of May.

Despite the expansionary monetary policy, inflation remains below 2 percent in the U.K. and euro zone (Table 2). Japan continues to experience deflation. Unemployment has continued to increase and capacity utilization has continued to drop throughout the developed world. Together, this suggests that central banks still have considerable latitude in keeping monetary policy stimulative.

Table 2
Consumer Price Index Growth Rates in May 2009

Headline
Core
Compared with May 2008 (percent) Compared with March 2009 (percent) Compared with May 2008 (percent) Compared with March 2009 (percent)
U.S. –1.0 –.2 1.8 2.3
U.K. 2.1 1.1 1.8 1.1
Euro zone .1 .5 1.5 1.2
Japan –1.1 –2.0 –.5 –2.0

SOURCE: National statistical offices.

Labor Markets Deteriorate

Unemployment continues its upward trend in developed countries, now topping 9 percent in the euro zone (Chart 4). The consensus forecast predicts that unemployment will increase through 2010.

Unemployment has also been rising in the developing world. The change in the unemployment picture has been particularly rapid in Russia, which saw its unemployment rate jump from 5.6 percent to 10.3 percent in a year.

Flight to Quality Reverses

The dramatic increase in risk premia in the wake of last September's market turbulence has continued to reverse as investors return to more normal appetites for risk. Stock markets around the world have moved upward in lock step with the U.S. Emerging market country risk premia, which measure how risky investors think it is to invest in particular countries, have shrunk considerably (Chart 5). The dollar, which had strengthened since September, has moved toward its pre-crisis value.

—Walt Pohl

About the Author

Pohl is a research analyst in the Research Department at the Federal Reserve Bank of Dallas.

 

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