x Abu Dhabi, UAEWednesday 26 July 2017

America wakes up to the reality of recession

Black Friday is the one of the most important shopping days of the year in America, when retailers' accounts finally go into the black.

Shoppers line up hoping for bargains on Black Friday.
Shoppers line up hoping for bargains on Black Friday.

When the doors opened at a Wal-Mart store in Long Island last Friday, the owners must have been hoping for a sales bonanza. Black Friday is the one of the most important shopping days of the year in America, when retailers' accounts finally go into the black. Could the mighty US consumer shake off all the bad news, credit woes and job insecurity? The early signs were good; a crowd had gathered and were crushing forward in their enthusiasm to get in. When the doors opened, they raced through to get to the bargains - most of which were "made in China" - but in the process trampled a 34-year-old security guard to death. Three shoppers were also injured. This, however, was one of the few stampedes of the day. For with the exception of cut-price stores - Wal-Mart is the epitome of the "pile it high, sell it cheap" philosophy - many retailers reported a disappointing turnout. But even worse, bargain hunters rather than high-rollers were out in force. Although sales figures were up by 3 per cent on the previous year, this was a Black Friday that was not just bad news for the family of the security guard: it was bad for the world's economy. Sales figures for the following day were weak and confidence was ebbing fast. Black Friday led to Black Monday: two day's ago, America's recession was officially declared, and the slowdown had started earlier than many had feared. According to the National Bureau of Economic Research (NBER), the US entered a recession in December of last year. The NBER is a business cycle committee, and is considered the arbiter of whether the US is in recession. The International Monetary Fund (IMF) now predicts the US, Europe and Japan will all contract next year. In a statement, the NBER said that the "decline in economic activity in 2008 met the standard for a recession". It defines a recession as a "significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income and other indicators". This is different to most countries, where a recession is defined as two consecutive quarters of declining GDP. The NBER does not make predictions on how long the recession might last. However, the figures are grim. US manufacturing output is falling at the fastest rate since 1982, and revised figures for US GDP show that it fell by 0.5 per cent in the third quarter. The US Federal Reserve has already cut interest rates to 1 per cent, but may cut further at its next meeting on Dec 16. That may not be enough to help the beleaguered economy. It is not just consumers feeling the pinch. In California, the governor, Arnold Schwarzenegger, warned that the world's tenth-largest economy was in a dire financial state. "Without immediate action, our state is heading for fiscal disaster," he said. California is reeling not only from falls in investments made in the equity markets, but also from declines in tax revenues and capital gains as a result of the downturn in the business and property markets, not to mention an inability to tap the debt markets for funding. "I've had to make tough choices that I wish I didn't have to make, and I know this is a terrible time to raise taxes, but it's also a terrible time to make cuts to very important programmes. But in an emergency like this, we have to take quick action to avoid even worse problems, even if they include decisions that we don't like," said Mr Schwarzenegger. If the Terminator thinks things are bad, so should the rest of us. In many countries, recession is no longer just a threat, but a reality. Japan was the first to succumb, when its economy shrank last quarter, entering its first recession since 2001. Japan's mood darkened last month as companies cut production, consumers spent less and fewer people looked for work. Companies surveyed by the Japanese government said they were planning the sharpest production cuts in 35 years as exports slowed. Sharp said it may fire workers and make fewer televisions; Toyota Motor will lay off half of its temporary staff; and Canon has postponed building a ¥100 billion (Dh3.92bn) printer cartridge factory in south-western Japan. "This is an unprecedented export recession," said Richard Jerram, the chief economist at Macquarie Securities in Tokyo. "The world stopped turning for about a month and a half after the middle of September, so it's not surprising you're seeing horrendous numbers." Companies plan to reduce output by 2.9 per cent this month, one of the most dismal outlooks since the government survey began in 1973, the Japanese trade ministry said yesterday. The government lowered its assessment of production, saying it's on a "downward trend". "Today's data is forcing me to reconsider the outlook; Japan's recession could be more severe than the previous one," said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. "The shocking production number was the biggest disappointment." Exports fell 7.7 per cent last month, the fastest pace in seven years, and shipments to Asia - where Japan makes about half of its overseas sales - fell for the first time since 2002. The drop caused inventories to climb to the highest level in five years, the government data showed. "The numbers in Japan are stunningly bad," said Glenn Maguire, the chief Asia-Pacific economist at Societe Generale in Hong Kong. He said Japan's reliance on exports of cars, TVs and stereos to the US left it the most vulnerable in Asia to the drying up of credit available to American consumers. The next major economic bloc to be hit was Europe - including the UK. The euro zone's economy fell into its first recession in 15 years in the third quarter, forcing finance ministers to set up a stimulus package. The European Central Bank (ECB) is facing calls to accelerate the pace of interest rate cuts this week. There is no shortage of uncertainty in the region. The ECB president, Jean-Claude Trichet, last week said that member states must respect the bloc's budget rules even as they increased spending to support their economies. "It is of the essence that the Stability and Growth Pact is respected," he said. The German chancellor, Angela Merkel, whose budget deficit was 0.2 per cent of GDP last year, said today her party would "swim against the tide" of calls to cut taxes in order to support consumer spending in Europe's largest economy. Ms Merkel's Cabinet last month agreed on a programme of measures costing ?32bn (Dh148.5bn) over two years, equivalent to 1.3 per cent of its GDP. The euro zone economy will shrink by 0.5 per cent next year as the world's advanced economies suffer their first simultaneous recession since the Second World War, the IMF forecasts. Recession is also stalking Britain. The government confirmed that the economic output had fallen by half a per cent in the past three months, and if it continues to fall, by the end of the year the UK will officially be in recession. The financial sector, the key driver of growth for the economy, is particularly badly hit. On Tuesday, £54bn (Dh296.1bn) was wiped off the value of the FTSE 100, with not a single riser in the leading index. Worse than expected UK, European and US manufacturing figures for last month, along with news that UK mortgage approvals in October reached their lowest level since 1999, have reignited fears that the recession would be a prolonged one, and prompted investors to take profits after last week's stock market rises. Just about every indicator suggests that the recession will be deep. Official GDP figures last week confirmed that the economy shrank by 0.5 per cent in the third quarter - its first contraction since spring 1992 and its steepest since the last recession took hold in 1990. The British consumer has joined his counterparts in Japan, Europe and America by hoarding rather than spending. Analysts forecast that a further retreat by consumers will sap the economy. Consumer confidence, stuck near record lows, is being eroded by the continuing slump in the housing market, with house prices down by about 14 per cent in the past year. Many market watchers expect a further fall of 15 to 25 per cent next year. Corporate Britain is also taking a battering. Manufacturing suffered a seventh month in a row of declining output in September, its longest run of consecutive declines for 28 years. The service industry is slowing, too. Job cuts are growing. Unemployment measured by the Labour Force Survey rose by 140,000 in the three months to September to 1.825 million and is set to top two million soon. At 5.8 per cent, the jobless rate is the highest since 2000. Banks are refusing to lend; the country is at gridlock. Is there a ray of hope anywhere? Some are pinning their hopes on the Chinese consumer. The Chinese government has already unveiled a 4 trillion yuan (Dh2.1 trillion) stimulus plan aimed at spurring domestic consumption to fill the gap as developed economies buy fewer Chinese goods. While Chinese consumers, as a group, still don't overshadow their American counterparts in total spending, their outlays are growing. China's retail sales jumped 22 per cent in October. "Since Oct 2007, the Chinese shopper alone has been contributing more to global GDP growth than the American consumer," said Jim O'Neill, an economist at Goldman Sachs in London. However, there are fears that China's booming economy, which has expanded by 9.9 per cent a year on average for three decades, may slow to 7.3 per cent next year, says China International Capital, a Beijing investment bank. That might still seem a lot, but economists warn that growth must be at least 8 per cent to keep the country's rising population in work. rwright@thenational.ae * with Bloomberg