Market Review: London February 2009 Commentary

The Myth of Decoupling

If the Japanese government’s manufacturing industry surveys are to be believed (and they usually should be), Japanese industrial production will have fallen by a third between the end of September 2008 and the end of March this year, a situation that will have resulted in production falling all the way back to levels not seen since 1983, before the bubble economy of the late 1980s was even thought possible.  Of course, one can argue that Japan has faced particular headwinds in dealing with the current global downturn: the collapse in global investment in plant and equipment has clearly hit Japan’s heavy industries badly and the decline in consumer investment in durable goods, coupled with the strength in the Japanese currency, has also badly affected Japanese export prospects.  However, at the same time we must note that Japan is not alone in Asia in terms of being badly affected by the global downturn. 

Despite its weak currency, Korea’s GDP declined by 5% in the fourth quarter of 2008 alone.  Elsewhere, Singapore fared only marginally better in the fourth quarter and Taiwan’s economic data is now so bad that to ‘annualise’ the rate of decline appears nonsensical!  Overall, Asian GDP and production trends are now even weaker than those encountered during the worst moments of the Asian Crisis in 1997-8 with the result that even Asia’s reputedly much-improved corporate financial health is now under significant stress once again.

Unlike the 1990s’ Asian Crisis, and contrary to many forecasters’ expectations, China’s economy has also been forced to endure a recession as part of the current global slowdown.  Although China is officially expected to grow by 6% or more this year (which suggests that the published GDP data will be somewhere close to this), it is clear from the industrial production, energy demand, cement and corporate data that China’s economy is either in or very close to a recession at present, despite the government’s introduction of what was described as a ‘massive stimulus plan’.  Despite Beijing’s hefty fiscal intervention, a probable implosion in private sector investment trends - caused not only by weak markets but also China’s increasingly suspect competitiveness position – and a significant weakening in consumption activity has pushed China into what is probably its first recession in the modern era.  It remains to be seen how this slowdown will interact with the country’s still problematic food supply situation and its political regime; the country is clearly facing challenges on many levels at present.