There is a grave risk of a global L-shaped depression
Nouriel Roubini -- Forbes
March 5, 2009 -- For those who argue that the rate of growth of economic activity is turning positive -- that economies are contracting but at a slower rate than in the fourth quarter of 2008 -- the latest data don't confirm this relative optimism.
In 2008's fourth quarter, gross domestic product fell about 6 percent in the United States, 6 percent in the euro zone, 8 percent in Germany, 12 percent in Japan, 16 percent in Singapore and 20 percent in South Korea. So things are even more awful in Europe and Asia than in the United States.
There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession. Here's why:
First, note that most indicators suggest that the second derivative of economic activity is still sharply negative in Europe and Japan and close to negative in the United States and China. Some signals that the second derivative was turning positive for the United States and China turned out to be fake starts. For the United States, the Empire State and Philly Fed indexes of manufacturing are still in free fall; initial claims for unemployment benefits are up to scary levels, suggesting accelerating job losses; and January's sales increase is a fluke -- more of a rebound from a very depressed December, after aggressive post-holiday sales, than a sustainable recovery.
For China, the growth of credit is only driven by firms borrowing cheap to invest in higher-returning deposits, not to invest, and steel prices in China have resumed their sharp fall. The more scary data are those for trade flows in Asia, with exports falling by about 40-50 percent in Japan, Taiwan and Korea.
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