Global economy to shrink; deflation greatest threat, says UN

The cost of goods leaving US factories has fallen for five months in a row, helping to reinforce fears of deflation

Gary Duncan, Economics Editor

The deepening global recession means that the world economy as a whole could shrink next year and will battle to avoid destructive Thirties-style deflation, the United Nations said yesterday.

The UN alert over what threatens to be the worst year for the global economy since the Second World War came as fears of deflation were stoked when US producer price inflation slid into negative territory, registering an annual fall of 1.5 per cent last month.

In a bleak assessment of world prospects, the UN said that the global economy was now deteriorating at such a pace that its main projections in yesterday’s grim report were already out of date.

Rather than its main published forecast for world growth this year of a meagre 1 per cent, the UN said that its more pessimistic scenario of zero growth, or outright global decline by 0.4 per cent, was now more realistic.

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Heiner Flassbeck, director of globalisation and development strategies at the UN Conference on Trade and Development (Unctad), said: “There is nothing unfortunately at the moment where we can say ‘this is positive’ or ‘this is giving a positive stimulus’ . . . For the world as a whole, the outcome could be zero, or even slightly below zero [growth]. I do not say this will go on for ever, but the coming months will get extremely tough.”

Mr Flassbeck said that the greatest threat now came from deflation of the sort suffered during the Great Depression, when falls in wages of 10 to 15 per cent in some economies triggered a drastic slump in consumer demand and brought world growth to a virtual standstill.

With official interest rates across the West tumbling towards zero, the UN issued a call for coordinated fiscal stimulus packages in countries around the world, such as that being planned by the incoming Obama Administration in the US.

The European Central Bank yesterday stepped up its efforts to combat the eurozone recession, cutting interest rates by a further half-point to 2 per cent, equalling previous record lows for the single currency era. The ECB has now cut rates by 2.25 percentage points since October.

Jean-Claude Trichet, the ECB president, signalled that the bank was set to cut eurozone rates still further, but indicated that the next move would probably come in March. “We didn’t say that it was now the limit and we would not move any more,” he said.

Anxieties over deflation taking hold were multiplied, meanwhile, by yesterday’s US producer prices figures. The cost of goods leaving factories fell for a fifth month in a row, dropping by 1.9 per cent, or 1.5 per cent down on a year earlier.

Headline US inflation, for consumer prices, is also widely tipped to turn negative in further official figures today.

However, these trends still fall short of full-blown deflation of the destructive sort suffered in the Thirties, since they are so far driven almost entirely by the rapid reversal of the past surge in oil prices. These have now plummeted from record highs above $140 a barrel in July last year to reach levels yesterday just above $35.

So-called “core” US inflationary pressures, which strip out food and energy costs, remain far higher than headline inflation. Core producer price inflation in December climbed to an annual 4.3 per cent rate in yesterday’s figures, for example.

— The Russian rouble sank to historic lows against the dollar and euro yesterday as a growing threat of recession forced Moscow to further devalue the currency.

After the Russian central bank widened the rouble’s permitted trading band for the fourth time in recent months, the currency fell to its lowest levels against the dollar since Russia opened up its economy in the Nineties, allowing the dollar to climb to 32.35 roubles. The euro also hit a record high of 42.55 roubles.

The move came with the once-booming Russian economy sliding as demand for its oil and gas slumps.

UK economy downturn 'frightening'

Workers in Staffordshire reflect on shorter hours and job fears

Business leaders have painted a bleak picture of the UK economy, with a survey suggesting the end of 2008 saw a "frightening deterioration".

The British Chambers of Commerce (BCC) said its survey results were "awful" and the worst since it began in 1989.

Elsewhere, a separate report suggested it had been the worst December for UK retail sales in at least 14 years.

On 23 January, official figures are set to confirm the UK is in recession with six months of negative growth.

Margins hit

The British Retail Consortium figures on sales from the High Street and online said that like-for-like sales in December were down 3.3% on a year ago while total sales shrank 1.4%.

This is despite the government cut in value added tax (VAT), which took effect in December.

Many hard-pressed customers couldn't be seduced into spending Stephen Robertson Director-general, BRC Tesco sees 'challenging' trading House sales 'continuing to fall' Is it really all doom and gloom?

This made for the worst December since the survey began in 1995.

Some High Street retailers, including Sainsbury's and Greggs, have been reporting strong Christmas trading - suggesting that the economic picture is not yet entirely bleak.

But food retailers were almost the only sector to show growth, the BRC said, amid what it described as "truly awful numbers".

"Non-food retailers had a torrid December despite a blizzard of promotions and deals, which would have hit margins," the BRC's director general Stephen Robertson said.

"Many hard-pressed customers couldn't be seduced into spending."

Earlier, supermarket giant Tesco reported a 2.5% increase in like-for-like sales in the key Christmas period.

'No positives'

The BCC report, based on a survey of almost 6,000 firms which employ 680,000 people, pointed to plunging domestic demand, falling exports and plummeting confidence in the last three months of 2008.

Quite frankly the last time I saw anything of this magnitude of decline was when I worked in the West Midlands in the early 1980s David Frost Director-general, British Chamber of Commerce Robert Peston's blog Hugh Pym: Economic analysis

"It is clear that the UK economy is facing a very serious recession, and the downturn is deepening at an alarming pace," said the BCC report.

"The results highlight a frightening deterioration in the UK economic situation."

Its latest survey - which covered the last three months of 2008 - showed "no positive features" it added, with both the manufacturing and service sectors worsening.

Manufacturing, home sales and orders, employment expectations, investment, confidence and cash-flow have all hit record lows.

In the service sector, every key area was at a new low.

BCC director general David Frost called for a national recovery plan to be "rolled out as soon as possible".

"These are truly awful results with the scale and speed of the economic decline happening at an unprecedented rate.

"Quite frankly the last time I saw anything of this magnitude of decline was when I worked in the West Midlands in the early 1980s," he said.

"The sheer scale of this comes as a surprise to many of us."

Printing money

The BCC's chief economist David Kern said that he now expected the UK economy to shrink by up to 2.4% in 2009, rather than the 2.2% he had earlier forecast.

"One must say that unfortunately in terms of GDP, this recession is worse than in the 1990s," he said.

The manufacturing sector is gloomy about its outlook, the survey found

But he added it was not worse than the 1980s, so it was still possible "to avoid a prolonged depression".

Last week, the Bank of England cut the cost of borrowing from 2% to 1.5% - the lowest since the Bank was founded in 1694.

Mr Kern said more rate cuts were likely, but that the authorities would have to go further to avoid a prolonged depression, including printing more money.

"The MPC is running out of conventional bullets," he added.

The suggestion that investment in factories and machinery was at record lows was particularly worrying, said Ross Walker, chief UK economist at Royal Bank of Scotland.

This indicated that private sector firms would see their capacity for recovery hindered when the UK came out of economic crisis, he said.

Shoppers 'Sidelined' In Long Retail Slump

A bankruptcy judge in Richmond will determine the fate of electronics retailer Circuit City. He will decide whether the company will be sold as a whole or be liquidated. (By Jeremy Bales -- Bloomberg News)

By V. Dion Haynes

Washington Post Staff Writer
Thursday, January 15, 2009; Page D03

Americans drastically curtailed their shopping last month, according to government data released yesterday, and consumers who have come to expect big price cuts are unlikely to increase their spending anytime soon, analysts said, causing trouble for retailers in the months ahead.

"The recession will be longer, deeper and the recovery disappointing because consumers are sidelined," said Mark Zandi, chief economist for Moody's Economy.com.

December retail sales fell more than twice as forecast, dropping 2.7 percent from November, according to the Commerce Department.

October to December sales were down 7.7 percent from the same period in 2007, the worst quarter for sales in at least four decades. The drop in spending was accompanied by rapidly rising unemployment and an uptick in savings.

"This is a record decline since 1967," said Michael Niemira, chief economist for the International Council of Shopping Centers, a trade group. He projected the annual sales decline in 2009 would be 1.3 percent, compared with 0.4 percent in 2008.

"I think the storyline there is we had so much contraction in the last part of '08," Niemira said. "It's difficult to dig out of the hole."

Consumer spending, which represents two-thirds of gross domestic product, has in some recent slowdowns helped drive economic recoveries, analysts said. But the growing jobless rate means some consumers have less to spend and others are nervous about spending. Analysts are forecasting that in 2009 the unemployment rate will increase to at least 8.5 percent from 7.2 percent and the savings rate will rise to 5 percent from 2.8 percent.

"You're not going to get a recovery without a faster pace of consumer spending," said Alan Levenson, chief economist for T. Rowe Price Associates.

During some previous recessions, shoppers resumed buying such big-ticket items as appliances, cars and houses despite flat salaries. The difference was that credit was much more available to consumers than it is now.

Although increased federal spending from President-elect Barack Obama's stimulus package is expected to boost the economy, analysts said they think it will do little to help lift consumer confidence.

"I think the retail sector will lag the typical economic recovery," said John Silvia, chief economist for Wachovia.

"The game is different" now, Silvia added. "Consumers have less access to credit and don't have the income to support spending."

The fallout on retailers has been pervasive.

Neiman Marcus, which reported a 31.2 percent sales decline in December, has announced it is laying off 375 employees. Gottschalks, a Fresno, Calif.-based department store, has filed for bankruptcy protection.

Tomorrow, a bankruptcy judge in Richmond will determine the fate of electronics retailer Circuit City. He will decide whether the company will be sold as a whole and remain a going concern or be liquidated.

Analysts ticked off a list of other retailers grappling with plummeting stock prices and/or declining sales: Dillard's, Eddie Bauer, Chico's, Borders, Bon-Ton and Pier 1. To survive, retailers are cutting jobs, closing stores, reducing inventory or delaying renovations and expansions.

"We've reduced our capital spending budget for '09," said Jim Sluzewski, spokesman for Macy's, which reported a 7.5 percent decline in same-store sales for November and December. "We initially planned to spend $1 billion, but we're going to reduce it by $550-$600 million or even a little more."

The December sales plunge, despite some of the most aggressive price-cutting in memory, suggested a long-term shift in consumer behavior. Consumers, analysts say, are accustomed to deep discounts and may no longer tolerate full prices. "People concerned about their jobs move into survival mode and slash all their spending by 20 and 30 percent," said C. Britt Beemer, chairman and founder of America's Research Group, a Charleston, S.C firm that tracks consumer behavior.

"We're going into January with extremely low consumer excitement," he said. "If 70 percent off doesn't excite them, I don't know what else will."

In a survey released yesterday by the firm, 33.2 percent of 1,000 consumers interviewed over the weekend said they felt pressured by credit card bills and debt, compared with 23.6 percent a year ago. Nearly 29 percent said they were buying only essential items and merchandise on sale, compared with about 18 percent a year ago. Only 4.8 percent said they were purchasing full-price items, compared with 10.8 percent a year ago.

The survey illustrates a decline in high-end retailers and growth of discounters. For instance, nearly 100 percent of the consumers surveyed over the weekend bought items at a discount store, compared with 90 percent a year ago. And only 1.2 percent bought jewelry, compared with 15.4 percent in 2008.

The slowdown is "conditioning consumers to look for deep discounts of 30 to 50 percent vs. the 15 to 20 percent" range of the past, said Tom Chin, managing director of Telsey Advisory Group in New York.

As a result, mall developers are beginning to think more about asking discount retailers such as Costco to anchor shopping centers, rather than relying only on traditional department stores, Chin said.

"Everyone is trying to evaluate who will be the winners in the next three to five years," he said.

Even online sales, which had been growing 19 to 28 percent over the past few years, were off. More people were buying online, but they were spending less.

Sales declined 3 percent in November and December, said Andrew Lipsman, director of industry analysis at ComScore, a digital marketing firm in Reston. "E commerce fell off the cliff this year," said Lipsman, attributing the decline to consumers cutting back on discretionary spending.

Economic Picture Bleak in Fed Report

Declines Span Regions, Industries

By Annys Shin

Washington Post Staff Writer
Thursday, January 15, 2009; Page D01

Business conditions across a broad range of regions and industries have continued to deteriorate in recent weeks, according to a Federal Reserve report released yesterday.

The Fed's "beige book," a compilation of anecdotes about business activity around the country, bears out gloomy forecasts of a weak start to 2009. It said that across the country, retail and auto sales were weak, manufacturing activity kept falling and banks remained reluctant to lend.

"If you're looking for something uplifting, you won't find it in the beige book," said Bernard Baumohl, an economist for the Economic Outlook Group, a consultancy in Princeton, N.J.

Last week, the Labor Department said unemployment rose in December to 7.2 percent, its highest point since 1993. Still, as bleak as the employment picture is already, the Fed report suggested significant job losses had yet to be counted.

In New York, for instance, substantial job reductions in the financial industry have yet to show up in government payroll statistics. The report also found that year-end bonuses at financial firms were estimated to be down 20 to 30 percent compared with a year ago at some of the smaller firms and more substantially at larger ones.

Several other districts also said employers were considering pay freezes and smaller bonuses.

The report indicated a long-anticipated decline in construction of office buildings, apartments and shopping centers has begun as commercial projects that had been in the works for several years reach completion and the pipeline for new projects dries up. Developers said they were unable to fund new projects and blamed tightfisted lenders. Potential tenants were as scarce as financing. In Manhattan, for instance, the office vacancy rate climbed to its highest level in two years.

The energy industry, which showed signs of softening in November, weakened more as demand has fallen.

Duke Energy, one of the biggest electric utilities in the country, saw electricity use drop last year compared with 2007 and expects another decline this year. James E. Rogers, chief executive of the Charlotte company, said in an interview with Washington Post reporters and editors that Duke has never seen two consecutive annual declines in electricity use.

Falling demand has also helped drive down prices for oil and natural gas and, in turn, production levels. The Dallas area reported a decrease in drilling activity and a decline in the number of active oil rigs since the previous survey.

"We're seeing projects almost on a daily basis tabled or canceled," said John Kilduff, an energy analyst for the futures and options brokerage MF Global. He added that the oil and natural gas production that shut down as a result of hurricanes Gustav and Ike last year is not likely to be completely restored.

Half of the regions reporting said businesses planned to reduce capital spending this year. Chemical giant DuPont is among them. DuPont Chairman Charles O. Holliday Jr. said in an interview that DuPont has cut its capital spending plans for 2009 by about 20 percent, with the biggest cuts in areas that serve the automobile and housing industries.

There were a few exceptions to the otherwise glum string of anecdotes. Defense and medical-device production in the Minneapolis area were up. Aerospace manufacturing held steady in the San Francisco area, as did food manufacturing and processing in the Philadelphia and Dallas regions.

Lower prices at the gas pump, coupled with end-of-the-year deals, inspired some consumers to get back behind of wheel of larger automobiles. Sales of large vehicles, for example, were up slightly in the San Francisco area. So were sales of light trucks in the Chicago region.

"We have seen some shifting in vehicle mix with gas prices coming down so much so quickly," said Mike Wall, an analyst with CSM Worldwide, a market research firm in Detroit. "We have seen some folks gravitate back toward the pickup truck segment, [but] not the very large SUVs."

Latvia Is Shaken by Riots Over Its Weak Economy

Ilmars Znotins/Agence France-Presse — Getty Images

Military personnel faced off with protesters in Riga, Latvia, on Tuesday night.

MOSCOW — Violent protests over political grievances and mounting economic woes shook the Latvian capital, Riga, late Tuesday, leaving around 25 people injured and leading to 106 arrests.

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Officers cleared demonstrators on Wednesday in Sofia, Bulgaria. Several countries have faced protests over economic issues.

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Ilmars Znotins/Agence France-Presse — Getty Images

A protester faced riot police officers on Tuesday in Riga, Latvia. About 25 people were injured when the rally turned violent.

In the wake of the demonstrations, President Valdis Zatlers threatened Wednesday to call for a referendum that would allow voters to dissolve Parliament, saying trust in the government, including in its ability to deal with growing economic problems, had “collapsed catastrophically.”

For years, Latvia boasted of double-digit economic growth rates, but it has been shaken by the global economic downturn. Its central bank has spent a fifth of its reserves to guard against a steep devaluation of its currency, the lat, and experts expect a 5 percent contraction of the country’s gross domestic product in 2009. Salaries are expected to fall substantially, and unemployment is expected to rise.

The violence followed days of clashes in Greece last month over a number of issues, including economic stagnation and rising poverty as well as widespread corruption and a troubled education system. In Bulgaria on Wednesday, separate riots broke out in the capital, Sofia, after more than 2,000 people — including students, farmers and environmental activists — demonstrated in front of Parliament over economic conditions, Reuters reported.

Mr. Zatlers has long been aligned with the governing coalition, so his threat to dissolve Parliament came as a surprise — and was testament to nervousness about how economic troubles in the region could intersect with simmering political grievances.

The rioting broke out Tuesday after around 10,000 people protested in historic Dome Square over the economic troubles and grievances involving corruption and competence of the government.

Several hundred protesters lingered after most of the crowd had left and started throwing snowballs and cobblestones at government buildings.

Several demonstrators also threw Molotov cocktails, according to Mareks Mattisons, a spokesman for Latvia’s Interior Ministry. In a public statement on Wednesday, President Zatlers denounced the violence, but said it was more important to ask “why people gathered in Dome Square.”

“We must not face further confrontation, we must do the things that are demanded by the public,” he said. “I refer to constitutional amendments, a plan to stimulate the economy, and reform of the national system of governance.”

Krisjanis Karins, a member of Parliament and former leader of the opposition New Era party, said the violence showed that financial woes had injected a new vehemence into old political complaints.

Protests in Latvia, he said, tended to follow a pattern of “standing, singing and just going home,” but the young protesters who showed up on Tuesday evening “seem to think the Greek or French way of expressing anger is better,” he said.

“In our neck of the woods, this just doesn’t happen,” he said. “But it did this time. Everyone is trying to figure out how much of this was provoked. Who are these people? Where did they come from?”

Whatever the answer, he said, Tuesday’s protests seem likely to force political change.

“In six months, we’re going to look back and yesterday will be a watershed,” he said. “I would be deeply surprised if it were not.”

President Zatlers made a series of strict demands of the Parliament, including a constitutional amendment that would allow voters to dismiss Parliament, and a new supervisory council to oversee economic development and the state’s use of loans.

He called for “new faces in the government,” chosen for competence rather than “their influence in the relevant party.” He said the changes must be made by March 31, or else he would propose a referendum that could dissolve Parliament.

“Only with such specific work can we calm the public down and offer at least a bit of hope that the process in this country will develop in a favorable direction,” he said.

The Peak Oil Crisis: Civil Unrest

Written by Tom Whipple

Before grappling with 2009, it might be useful to remind ourselves that there is a dark side to what lies ahead.

There was a little flurry in the news last week when it was discovered that the Army War College had released a report talking about preparing for civil unrest in the U.S. When you read the report, it turns out to be yet another warning about generals preparing for the last war. It devotes only three pages to the idea that the Army might soon find itself so embroiled in helping local authorities cope with civil unrest that international commitments, such as the war on terrorism, could become secondary concerns.

Since the close of the Civil War, America has enjoyed nearly 150 years of domestic tranquility. There were, of course the Indian wars, some labor disputes and a handful of urban riots in recent decades, but these were isolated and did not last for long. Even during the great depression of the 1930's America's social fabric stayed largely intact. Signs that these idyllic decades may be coming to close are starting to arise. In the last few weeks the deteriorating economic situation has seen serious disturbances in Greece and Thailand. We are beginning to read of disturbances in Russia and China.

Most realists foresee that 2009 will be a bad year with stock markets declining, unemployment rising, real estate values falling, government bailouts continuing, deflation morphing into inflation, the dollar falling, and oil prices rising. Thus far the economic downturn has not had a serious social impact. However, food banks are running short, shoplifting and other property crimes are on the rise, child neglect is increasing as is infant mortality. However, considering the pace at which people have been thrown out of work during the last year most seem to be getting by - so far.

Of all the world's nations, America is probably the worst prepared to deal with deep, prolonged economic hardships, for more of us have disconnected from 19th century, rural, somewhat self-sufficient, lifestyles than in most other countries. In the 1930's many found that they could still return to the family farm, where food, shelter, and meaningful work was available. In 2010 that option exists for very few; we have become dependent on a complex infrastructure fueled by oil for our food, water, clothing and warmth. Start reducing the flow of oil and increasing numbers of us are going to become increasingly desperate.

There are too many turns in the twisting paths that the current economic and oil depletion crises could take to speculate on the details of what is likely to happen. However, there are many potential "failed states" around that we are likely to have concrete examples, shortly, of what happens in the 21st century when civil order breaks down.

It is clear that we are already seeing the opening ripples of what might turn out to be the major social problem of the century - caring for large numbers of destitute people. Most of the social nets in America such as unemployment insurance, charities or shelters have strict time or limited resources. Already charity and religious contributions are starting to drop.

As the situation worsens, it is going to be much cheaper for governments at all levels to provide essential food, shelter and other services, rather than wait for desperate people to start stealing and become ensnared in the criminal justice system. One of the key benchmarks of the next few years is how quickly governments will redeploy resources away from 20th Century priorities such as space travel, expensive weapons systems, and highways towards simply getting people through the decades of transition from current lifestyles. The change will not be an easy one.

Before we get to mobs in the streets, we are likely to go through a time of increasing petty crime and the ensuing pressures on the criminal justice system. Somebody is going to have to think through the appropriate response to major increases in shoplifting and burglaries by people who are trying to feed children after having exhausted all other avenues of assistance.

It is likely that who is kept in prison and for what is going to have to be rethought. State and local revenues are already dropping rapidly and the day is not far away when choices between funding school systems and maintaining vast prison systems will need to be addressed. Alternative forms of deterring criminal behavior and forms of punishment will need to be devised. Indeed the economic situation could deteriorate so rapidly that some of these changes may need to be made in months rather than years.

It is likely that part of the of the solution to getting hundreds of millions through decades of shortages will involve increasing infringement on what many now consider their civil liberties. Better forms of personal identification will be necessary. It is likely that rationing of many things we take for granted such as fuel, food, medical services and travel and even places of residence may become necessary. Other societies have found such measures necessary in times of crisis.

America has not faced a serious domestic crisis for 150 years. We have never faced a situation where 300 million of us bound up in a complex and interdependent society has had to make major involuntary changes in our lifestyles.

U.S. military report warns 'sudden collapse' of Mexico is possible

By Diana Washington Valdez / El Paso Times

Posted: 01/13/2009 03:49:34 PM MST

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Mexico's President Felipe Calderon announces a new economic stimulus package in Mexico... (AP photo)

EL PASO - Mexico is one of two countries that "bear consideration for a rapid and sudden collapse," according to a report by the U.S. Joint Forces Command on worldwide security threats.

The command's "Joint Operating Environment (JOE 2008)" report, which contains projections of global threats and potential next wars, puts Pakistan on the same level as Mexico. "In terms of worse-case scenarios for the Joint Force and indeed the world, two large and important states bear consideration for a rapid and sudden collapse: Pakistan and Mexico.

"The Mexican possibility may seem less likely, but the government, its politicians, police and judicial infrastructure are all under sustained assault and press by criminal gangs and drug cartels. How that internal conflict turns out over the next several years will have a major impact on the stability of the Mexican state. Any descent by Mexico into chaos would demand an American response based on the serious implications for homeland security alone."

The U.S. Joint Forces Command, based in Norfolk, Va., is one of the Defense Departments combat commands that includes members of the different military service branches, active and reserves, as well as civilian and contract employees. One of its key roles is to help transform the U.S. military's capabilities.

In the foreword, Marine Gen. J.N. Mattis, the USJFC commander, said "Predictions about the future are always risky ... Regardless, if we do not try to forecast the future, there is no doubt that we will be caught off guard as we strive to protect this experiment in democracy that we call America."

The report is one in a series focusing on Mexico's internal security problems, mostly stemming from drug violence and drug corruption. In recent weeks, the Department of Homeland Security and former U.S. drug czar Barry McCaffrey issued similar alerts about Mexico.

Despite such reports, El Pasoan Veronica Callaghan, a border business leader, said she keeps running into people in the region who "are in denial about what is happening in Mexico."

Last week, Mexican President Felipe Calderon instructed his embassy and consular officials to promote a positive image of Mexico.

The U.S. military report, which also analyzed economic situations in other countries, also noted that China has increased its influence in places where oil fields are present.