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The recent upturn in Asian economies is creating a dangerous optimism that almost wilfully ignores the difficulties ahead. Future historians will mark 2008 as the year that the development model that has driven much of Asia’s rapid growth for the past two decades went bankrupt. While the next decade will represent a difficult transition towards a new development model, unfortunately many Asian countries are responding to the economic crisis with policies that may temporarily boost growth but that are only likely to make the transition more difficult.
At the centre of the Asian development model, with China providing a steroid-fuelled example, were policies aimed at mobilising high levels of domestic savings and channelling massive investment into productive capacity. These policies boosted savings by constraining consumption even while they forced rapid growth in domestic production. One of the consequences of the Asian development model has been that production outgrew consumption for decades. When a country produces more than it consumes, it must run a trade surplus to export its excess capacity. The Asian model consequently required high and rising trade surpluses that allowed Asian producers to produce far in excess of what Asian consumers could afford to absorb.
But there cannot be trade surpluses without trade deficits elsewhere. A fundamental requirement for the Asian model was that foreigners were able to run the requisite trade deficits. In practice, only the US economy and financial system were large and flexible enough to play this role. The Asian model, in other words, implicitly involved a massive bet on the willingness and ability of the US to continue to run large and rising trade deficits.
For nearly two decades US households borrowed recklessly to finance the consumption binge that allowed Asian exporters to continue exporting excess capacity but, as household balance sheets in the US became vastly overextended, it was just a question of time before a long deleveraging process would occur. The global financial crisis is part of this very process.
Japan's economy contracted by a 15.2 percent annual pace in the first quarter — its sharpest drop on record — as exports plunged, companies slashed production and families cut back on spending, the government said Wednesday.
Wednesday's data confirmed what many had been dreading. The drop in gross domestic product was the steepest since Japan began compiling such statistics in 1955. Compared to the previous quarter, GDP fell 4 percent. That's the fourth straight quarter that the economy shrank.
Like its Asian neighbors, Japan has been been pummeled by the unprecedented collapse in global demand triggered last year by the U.S. financial crisis. Manufacturers have had to suspend production, shut down plants and lay off thousands of workers, and the possibility of a rising jobless rate could drag on any nascent recovery.
After a queasy period when the U.S. economy went from bad to dreadful beginning last fall, a series of improved reports has fueled hopes that the country is on the cusp of recovery. Corporate borrowing costs have fallen. Surveys of businesses and households show increased confidence. The labor market is showing tentative signs of improvement. Investors have seized onto these "green shoots," as Federal Reserve Chairman Ben Bernanke called them, sending the Dow Jones Industrial Average up 30% from its 12-year low in March.
Yet last week's government report that retail sales fell in April sapped hopes that consumer spending is on the rise. And the housing market, where the seeds of recession were sown, remains distressed. In brief, the signs of recovery so far have been inconclusive.
"The shoots are still pretty green and pretty thin," warns economist James Hamilton of the University of California, San Diego.
Commercial real-estate loans could generate losses of $100 billion by the end of next year at more than 900 small and midsize U.S. banks if the economy's woes deepen, according to an analysis by The Wall Street Journal.
Such loans, which fund the construction of shopping malls, office buildings, apartment complexes and hotels, could account for nearly half the losses at the banks analyzed by the Journal, consuming capital that is an essential cushion against bad loans.
Total losses at those banks could surpass $200 billion over that period, according to the Journal's analysis, which utilized the same worst-case scenario the federal government used in its recent stress tests of 19 large banks. Under that scenario, more than 600 small and midsize banks could see their capital shrink to levels that usually are considered worrisome by federal regulators. The potential losses could exceed revenue over that period at nearly all the banks
The core of Keegan's strategy is retrenchment by U.S. consumers as they go from their debt-enabled buying binge of the last decade to balance-sheet repair. He figures the process won't stop until the consumption portion of gross domestic product shrinks from more than 70% now back to its long-term average around 65%.
That process may already be occurring. According to the Federal Reserve, consumers slashed borrowing in March by the largest dollar amount since the government started keeping track in the 1940s.
A few percentage-points worth of spending relative to GDP doesn't seem like a lot, unless you are talking about a $14 trillion economy. "I've always been of the theory that if you get the consumer right, you're going to get U.S. GDP right and you'll get the trend in global GDP right," Keegan says.
The Empire State Manufacturing Survey indicates that conditions for New York manufacturers worsened only modestly in May. Although negative, the general business conditions index rose 10 points to -4.6, its highest level since August of last year. The new orders index fell several points and remained below zero, while the shipments index inched into positive territory. The inventories index remained negative, but rose from last month’s record low. Price indexes also continued to be negative, with the prices received index falling 10 points to a record low. Employment indexes indicated further contraction in employment levels and in the average workweek. Future indexes improved substantially for a second consecutive month; the future general business conditions index rose 11 points to its highest level since September.
Industrial production decreased 0.5 percent in April after having fallen 1.7 percent in March. Production in manufacturing declined 0.3 percent in April and was 16.0 percent below its recent peak in December 2007. The decreases in manufacturing in April remained broadly based across industries. Outside of manufacturing, the output of mines fell 3.2 percent, as oil and gas field drilling and support activities continued to drop. The output of utilities moved up 0.4 percent. At 97.1 percent of its 2002 average, industrial output in April was 12.5 percent below its year-earlier level. The capacity utilization rate for total industry fell further in April, to 69.1 percent, a low over the history of this series, which begins in 1967.