Sunday, April 19, 2009

Some Age Related Charts

What we can see from the above chart is that while Sweden starts off in 1990 relatively older than Finland, and especially Greece, by the time we get to 2020 the order has reversed. Both Sweden and Finland fare rather better than Greece, which undergoes a period of rapid ageing. Of course many ideosyncratic factors can influence this process, such as the moment in which the demographic transition was initiated, the speed with which it occured, or the impact of WWII and its aftermath, and of course rates of immigration are clearly a factor. But what is so striking about this chart is the way in which the fertility effect seems to predominate, since Sweden and Finland have much higher levels of fertility than Greece.

If we now look at the median age comparison for Austria, Belgium and Switzerland, we will again see that (while all three are ageing quite fast) one country - in this case Austria - is ageing much more rapidly than the other two.

and again it is Austrian fertility, which falls significantly below that of the other two and effectively stays there that seems to carry most of the burden in explaining why the Austrian population is now about to age so rapidly.

And if we now move on to look at some the longer term growth charts.

Thursday, April 9, 2009

Stimulating Stuff

The Japanese government should spend a bigger-than-expected 15.4 trillion yen ($154 billion) on economic stimulus, the ruling party said on Thursday, causing bond yields to sink but boosting stocks in sectors seen benefiting from the higher spending.

The new spending should be funded by issuing new bonds, the party said in a draft proposal issued ahead of a major policy speech by Prime Minister Taro Aso later on Thursday and the announcement of the package on Friday.

Asian central banks forced into action - Apr-07Japan boosts aid to struggling companies - Apr-08Lex: Japan’s stimulus - Apr-08Lex: The Sharp end - Apr-08The stimulus spending – 3.1 per cent of GDP – is to battle Japan’s deepest recession since World War Two, which has slashed exports and corporate profits, prompting firms to cut production and lay off thousands of workers.

Bonds sank because the size of the proposed spending is higher than an earlier mooted level of around 10 trillion yen, traders said, raising the prospect of a large supply of new bonds.

But shares in automakers and solar power-related firms rose after the ruling Liberal Democratic Party proposal for measures to promote the use of solar panels and fuel-efficient cars.

The plan came out as data showed Japan’s core machinery orders unexpectedly rose in February due to gains in the services sector, in a tentative sign domestic demand may be stabilising.

Analysts warned, however, that the orders also showed that Japanese exporters continue to suffer, highlighting the challenge the government faces as it compiles additional stimulus measures to combat the worst recession since World War Two.

”Looking at the components, orders from non-manufacturers increased for two consecutive months, showing that domestic demand is starting to turn around. In contrast, external demand is still weak,” said Satoru Ogasawara, an economist at Credit Suisse.

Core private-sector machinery orders, a leading indicator of capital spending, rose 1.4 per cent in February from the previous month for the first gain in five months. The median market forecast was for a 6.7 per cent fall.]

Orders from non-manufacturers rose 3.3 per cent in February, while those of manufacturers, hit hard by the slide in exports, fell 8.1 per cent.

Machinery orders still fell nearly a third from a year earlier but the unexpected uptick added to the weight on bonds from the stimulus package. The benchmark 10-yr yield rose 2.5 basis points to a nearly five-month high of 1.480 per cent..

”Extra issuance of around 10 trillion yen is now expected given the size of the stimulus. Not surprisingly the bond market sees this as bearish news,” said Tetsuya Miura, chief fixed-income strategist at Shinko Securities.

The LDP urged the government to add 10 trillion yen to a loan guarantee scheme for small businesses and recommended subsidies for environmentally friendly cars and solar panels. Shares in Toyota Motor, maker of the ”Prius” hybrid, rose 2.4 per cent while those of Mitsubishi Motors , the only mass-volume carmaker with an electric car prototype on the road, climbed 2.8 per cent.

Sharp, the world’s No.2 maker of solar cells, surged 8 per cent while Kyocera, the world’s No.4 solar cell maker, climbed 1.9 per cent.

The package still faces a potentially stormy ride through parliament, where the opposition controls the upper house and can stall legislation.

Aso has threatened to bring forward an election due by October this year if the opposition stalls the package.

The package would add to spending of 12 trillion yen already planned under previously announced stimulus measures, taking the total stimulus spending to combat the global financial crisis to around 5.5 per cent of GDP.

The Japanese economy shrank 3.1 per cent in October-December from the previous quarter and is expected to have shrunk a further 2.5 per cent in January-March.

The contraction is bigger than in other major economies, despite Japan’s banking system being among the least damaged by the credit crisis, because of the country’s reliance on exports of cars and electronics.

Japan’s record 15.4 trillion ($153 billion) stimulus package may give a short-term boost to the nation’s economy, while leaving it saddled with a debt burden that will smother future growth, economists said.

The plan unveiled yesterday by Prime Minister Taro Aso, who faces elections this year, is aimed at creating jobs in an economy heading for the worst recession since 1945. Equal to 3 percent of gross domestic product, the measures will add to debt that the OECD already forecasts will rise to 197 percent of gross domestic product next year.

“The stimulus will probably prevent Japan from falling apart in the short term, but it will leave a massive bill for the future,” said Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo. “The package doesn’t do anything to promote a sustainable economic recovery.”

The plan does little to address the nation’s liabilities, give its aging citizens confidence in their pension system, or encourage them to spend some of their 1,400 trillion yen in financial assets, according to Kirby Daley, senior strategist at Newedge Group in Hong Kong.

“The fiscal situation of the government is deteriorating faster than anyone imagined,” Daley said in an interview with Bloomberg Television. The government needs to address its debt “so the Japanese consumer feels comfortable that their pension system is viable. They will then start to unlock those savings,” he said.

Financing Package

Finance Minister Kaoru Yosano said the government will sell more than 10 trillion yen of debt to fund the spending on top of 33.3 trillion yen of bonds to be issued this fiscal year. That would take total liabilities to more than 800 trillion yen by March 2010, excluding short-term debt that the Organization for Economic Cooperation and Development uses to calculate its ratio.

The debt burden will be borne by a shrinking population that will be hard pressed to keep the economy growing fast enough in years to come, said John Richards, head debt-market strategist for the Asia-Pacific region at Royal Bank of Scotland Plc in Tokyo.

“The burden of this debt is going to be felt and it’s going to be much worse than people thought,” Richards said. “It’s going to result in higher interest rates and slower growth than Japan can otherwise achieve.”

Weighing Tax Increase

Aso, 68, said the government will consider raising the consumption tax from the current 5 percent once the economy recovers “in order to not leave a huge debt to our children.”

Bond yields are already rising, climbing to the highest in almost five months on April 9 on speculation the supply of debt will keep increasing as the government tries to spend its way out of the recession.

“Yields may rise as the government fails to give confidence that the stimulus package will improve jobs and consumption and boost tax revenue,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “Higher government bond yields may lead to higher borrowing costs for companies,” stunting investment and economic growth, Morita said.

Aso pledged to create up to 2 million jobs in the next three years and boost demand by between 40 trillion yen and 60 trillion yen by focusing on industries such as solar power, electric cars and energy-saving consumer electronics.

That compares with the 3.5 million jobs U.S. President Barack Obama pledged to save or create with his $787 billion stimulus package. The 25 trillion yen in total spending announced by Aso since he became prime minister in September is about 5 percent of GDP, a ratio comparable to the U.S. stimulus.

Boost Demand

“Aso is very optimistic” on that jobs creation number when you compare it with Obama’s plan, Daley said. “When you throw $150 billion at an economy in one year, you will see an effect. It will not be long term, nor sustainable.”

The Nikkei 225 Stock Average erased its losses for the year as details of the stimulus were leaked by ruling party officials during the week. Economists said the plan would help moderate the economy’s deterioration later this year.

“This new package likely will significantly boost domestic demand, mainly in private consumption and government investment, from the third quarter,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo.

Analysts said that fixing the country’s long-term fiscal problems is the key to stimulating domestic consumption and weaning the country off its export dependence.

Japan’s older generation is reluctant to spend after the government revealed two years ago that it had lost pension records for 50 million people, or more than a third of the entire population. Younger people are growing concerned that the system will have run out of money by the time they retire.

Retirement Worry

A record 84 percent of Japanese are worried about retiring because they say they lack savings, an annual Bank of Japan survey showed in October.

“What households and the elderly need to see in order for them to start spending money is evidence that they don’t have to worry about retirement,” said Shirakawa at Credit Suisse. “The government isn’t providing any relief or convincing plans for the future. It’s all cheap talk by politicians.”

Wednesday, April 8, 2009

Debt In The East

Eastern eggshells
By Stefan Wagstyl

Published: April 8 2009 19:21 | Last updated: April 8 2009 19:21

T he financial stability report regularly published by the Hungarian central bank is not a document that usually makes compelling reading. But this week’s, bearing the results of an assessment of the country’s banks, was different.

At first glance, all seemed reassuring. If the economy performed in line with mainstream forecasts and contracted by 3.5 per cent this year – and if the exchange rate stabilised at 290 forints to the euro – banks would keep their capital ratios above 10 per cent of total assets, the report found. Comfortably higher, in other words, than the international regulators’ 8 per cent minimum.

But under a “stress scenario”, with gross domestic product plunging 10.5 per cent and the forint sliding 15 per cent, capital adequacy would drop to that 8 per cent level. Banks accounting for nearly half the total assets would fall below the minimum, it disclosed.

Hungary’s economy is indeed deteriorating faster than expected. The forint trades at about 6 per cent below the central bank’s baseline forecast, while a 29 per cent decline in industrial production for February, also announced this week, has pushed economists to cut their GDP forecasts to minus 5 per cent or worse. Nor is this the whole story. As the central bank’s report says: “The calculations described above are characterised by considerable uncertainty . . . [making] credit risk forecasts very uncertain.”

The Hungarian National Bank is addressing questions that bankers, business people and political leaders around the world are trying to answer. The search is particularly acute in central and eastern Europe (CEE) because the region has been especially reliant on credit – foreign credit in particular – for its recent rapid development.

At last week’s London summit of the Group of 20 industrial and developing nations, world leaders promised extra money for the International Monetary Fund – much of which is likely to be used to support CEE. Even after this week’s sell-offs, regional currencies and stock markets are comfortably above the lows seen in February and early March. But the crisis is not over. As Andreas Treichl, chief executive of Austria’s Erste Group, a big investor in CEE, says: “Nothing has improved over the past few weeks but the market sentiment which was worse than it should have been.”

There is still plenty to worry about, not least the possible knock-on effects on western Europe and its banks, which dominate banking in most CEE countries. Dominique Strauss-Kahn, the IMF managing director, told the Financial Times in an interview last week: “The risk of spillovers or contagion in central and eastern Europe exists . . . One issue is what might happen in these countries. Another is the possible impact on other countries whose banks have a big exposure to central and eastern Europe. We are not saying something is going to happen but it could, so the situation needs to be watched carefully.”

As Mr Strauss-Kahn knows well, CEE countries are not equally vulnerable. Six states are already in IMF anti-crisis programmes – Hungary, Latvia, Ukraine, Belarus, Georgia and Armenia. Three more are close to starting programmes – Romania, Serbia and Bosnia. But at the other end of the scale, Poland and the Czech Republic have said they do not need such assistance and Poland has actually contributed to Latvia’s programme.

In politics, too, there are wide differences: Russia and Poland, the region’s two largest economies, seem stable, as does Romania following recent elections. The Czech Republic and Hungary have had their governments collapse in recent weeks and Ukraine is in prolonged crisis, with its leaders divided and Russia breathing down its neck.

Economic and political difficulties are not unique to the region. In western Europe, one country has already required an IMF rescue (Iceland), two have lost governments (Iceland and Belgium), several have been forced to rescue ailing banks (including Ireland, the UK and Germany). As elsewhere, global events will also be important in determining how the crisis develops locally. But the CEE states are generally more fragile – as new democracies with immature market economies and, crucially, their high dependence on foreign credit. Having borrowed abroad, largely to finance their post- communist transformations, almost all CEE countries face a hard task in refinancing their external obligations.

The IMF spells out the risks in a report disclosed this week in the FT: “The financial crisis is putting severe strains on the pre-existing vulnerabilities of emerging European economies . . . Credit losses at foreign subsidiaries of west European banks are threatening to start a vicious downward cycle . . . Regional currencies have come under pressure and tension among currencies is increasing.” The authors estimate the region (excluding Russia because of its huge foreign exchange reserves but including Turkey) must roll over $413bn (£281bn, €311bn) in maturing external debt this year and finance $84bn in current account deficits, with smaller amounts due in 2010. Assuming debt rollover rates decline to 50 per cent for private debt and 90 per cent for sovereign this year, with modest improvements in 2010, the IMF estimates the region’s financing gap – the money that cannot be found in the market – could be $123bn in 2009 and $63bn next year, or $186bn altogether.

On top of this, the region’s banks, largely run by west European groups, could face non-performing loans of about 20 per cent of total loans. West European banks, with a regional exposure totalling $1,600bn, could see losses of $160bn. They might need $100bn in new capital – or $300bn in “a more severe full-fledged regional crisis”.

Opinions about the IMF’s estimates differ vary. Pessimists say the Fund is too positive because it starts with a predicted GDP decline for 2009 of 2.5 per cent. Among the gloomier forecasters is the UK’s Capital Economics, which has pencilled in 6 per cent. As for rollover rates, optimists say success levels in refinancing debt are much higher than the IMF’s 50 per cent for private borrowers. Even if rates dropped sharply in past crises, they argue, this time things will be different given the European Union’s support.

Bankers admit bad debts will climb from about 3 per cent of total loans but say IMF is too negative with its 20 per cent forecast. Erste’s Mr Treichl says this figure is “absurdly high”, since CEE banks do not have the old debts that hang over some west European lenders. Also, with a ratio of total loans to GDP of about 100 per cent against 250 per cent, CEE is less indebted than western Europe, so risks of a spiral of cross-defaults are lower.

But dangers lurk in the rapid annual credit growth some countries saw in recent years, when banks may have cut corners on credit checks – and in the deep economic downturn, which is putting borrowers under more pressure than in western Europe. Neil Shearing at Capital Economics sees nothing absurd in a bad debt figure of 20 per cent. “Russian officials have already admitted that in Russia it could be 10 per cent. It doesn’t seem ridiculous to think that in some other hard-hit countries it could be 20 per cent.”

Whatever happens, the IMF is likely to provide the bulk of any official emergency support. Its capacity has been increased by the G20’s approval of $250bn in new special drawing rights, the IMF’s currency, and a call for $500bn in loans for the Fund.

The IMF is certain to continue playing the lead in assisting CEE on a country-by-country basis, with a strong supporting role for the EU and for individual states, as Sweden has already shown in the Baltic states. This will suit the EU, which has so far resisted IMF demands for a region-wide approach. Mr Strauss-Kahn argues: “Just because some economies are small, it does not mean they will have no impact on the region if their problems worsen . . . That’s why we have a big programme in Latvia although it’s a small, $30bn economy.”

But EU leaders do not want to write blank cheques. They draw distinctions between eurozone members on the one hand, where they intend for states to back each other without IMF help; EU members beyond the eurozone, which will be supported in conjunction with the IMF, as in Latvia’s €7.5bn ($10bn, £6.8bn) rescue where the EU has provided more money than the Fund; future members such as Serbia, which could receive more limited backing; and countries without a membership pledge, notably Ukraine, which will secure even less attention.

Set against this caution is EU members’ readiness to permit their banks to stand by their foreign commitments even if they are drawing on government refinancing funds and guarantees. Austria, with CEE loans equivalent to 70 per cent of GDP, is most exposed, followed by Sweden (30 per cent), Greece (20 per cent) and Belgium (20 per cent). Despite some grumblings from officials, no parent groups have had to stop backing subsidiaries.

At Erste, Mr Treichl says Austrian banks have faced no difficulties. However, the IMF warns in its report that this should not be taken for granted. “Where this burden would fall, and how it would be shared between advanced and emerging markets is an open and critical question.”

Much depends on global markets, where the mood remains nervous, and on the west European economy, where the recession is deepening. However, political and economic events on the ground in CEE also matter. The key question is whether governments can implement the radical restructuring that the more vulnerable economies require. Latvia, Ukraine and Hungary are in political turmoil and have their credit default swaps, a risk measure, trading far above their neighbours.

Demonstrations this year in these three countries, and in Lithuania and Bulgaria, have created a sense of regional ferment. That could deepen following this week’s events in Moldova, where activists stormed parliament and the presidential palace. But Poland’s centre-right government is even more popular than when it won landslide elections two years ago. The Czech government fell last month but investors are unconcerned because the economy is seen as sound.

So for politicians, as for financiers, it is a matter of case by case. But, as Mr Strauss-Kahn suggests, both ignore the risks of contagion at their peril.

Riots In Moldova

Moldovan riot police regained control of the president's office and Parliament early Wednesday after they were ransacked by protesters who claimed parliamentary elections were rigged.

An Associated Press reporter saw about 100 riot police surround the buildings, which had been stormed a day earlier by protesters who set fire to furniture and hurled computers out of the windows. More than 50 people were injured.

Police arrested 193 people, including eight minors, on charges of "hooliganism and robbery" following the protests against the ruling Communist Party's victory in weekend elections, Interior Ministry spokeswoman Ala Meleca said. Some were suspected of looting shops in Chisinau as the unrest continued into the night.

Authorities on Wednesday cleared streets littered with smashed computers, torn-apart armchairs and broken chairs from the Parliament. They swept up burnt documents and shards of glass. Every window on the first six floors of the 11-story Parliament building was smashed.

President Vladimir Voronin accused pro-European opposition parties of being behind the protests. His Communist Party, which has been in power since 2001, won about 50 percent of the vote in Sunday elections.

In a statement read Tuesday on Moldovan TV by a journalist, Voronin called opposition parties "fascists (who) want to destroy democracy and independence in Moldova." He said authorities would "decisively defend the democratic choice of the people."

The violence started Tuesday after at least 10,000 mostly young protesters gathered outside Parliament, demanding new elections and shouting "Down with the Communists" and "Freedom, freedom." Organizers of the demonstration, which started peacefully, used social messaging network Twitter to spread information about the protests.

"We sent messages on Twitter but didn't expect 15,000 people to join in. At the most we expected 1,000," said Oleg Brega, who heads the non-governmental pro-democracy group Hyde Park. He added that attack on Parliament and the adjacent presidential office was not planned.

Demonstrations continued on Wednesday. About 400 protesters gathered outside the government headquarters in Chisinau and dozens more outside Parliament.

In neighboring Romania, more than 1,000 people, mostly students, gathered in rallies to support the Moldovan protesters. Moldova was part of Romania until 1940.

Two Romanian press groups protested that 18 journalists working for Romanian and international media were not allowed into Moldova by border police on Tuesday. They said the journalists were told they did not have medical insurance or an official invitation, which are not usually required.

International observers said Moldova's election was fair, but Chisinau Mayor Dorin Chirtoaca said many people voted more than once.

"The elections were fraudulent, there was multiple voting," Chirtoaca, who is also the deputy leader of the opposition Liberal Party, said on Realitatea TV.

Opponents blame the Communists for low living standards and for preventing the former Soviet Republic from forming closer ties with the European Union. Moldova, with a population of 4.1 million, remains one of Europe's poorest nations with an average monthly salary of $350.

Sunday's results allow the Communists to form a majority in the 101-seat legislature, but they may need backing from other parties to elect a new president. Voronin will step down this month after serving a maximum of two terms in power.

The Communists have enjoyed close relations with Russia and say they want to strengthen relations with the European Union. The only foreign leader to congratulate Moldova after the elections was Russian President Dmitry Medvedev.

CHISINAU, Moldova -- Moldovan protesters ransacked the president's offices and the parliament Tuesday in violent protests over parliamentary elections that President Vladimir Voronin said amounted to a "coup d'etat."

RIA-Novosti reported that the authorities and opposition leaders agreed late Tuesday to a recount of votes cast in Sunday's parliamentary election, which was easily won by Voronin's Communist Party.

Voronin said in a television address late Tuesday that opposition leaders had embarked on a "path to the violent seizure of power."

"Everything that they have undertaken in the last 24 hours cannot be described as anything other than a coup d'etat," Voronin said, referring to opposition leaders.

He said the authorities "would resolutely defend the state against the leaders of the pogrom."

President Dmitry Medvedev has already congratulated Voronin on his party's election win, and the Foreign Ministry said Russia was deeply concerned by the events in Moldova.

"We are following the situation with concern," Deputy Foreign Minister Grigory Karasin said, Interfax reported.

About 10,000 demonstrators massed for a second day in the capital of Europe's poorest country to denounce the vote as rigged. They hurled computers into the street while police took cover behind riot shields.

Moldovan state television said one young woman choked to death from carbon monoxide poisoning in the parliament building.

It cited a senior doctor at Chisinau emergency hospital as saying 34 other protesters had been injured, including two in a serious condition in hospital. Some 80 police officers also received treatment for injuries, it said.

Opposition leaders called for a halt to the protests and said they were pressing for a recount of all votes cast.But they did not confirm the RIA-Novosti report that authorities had agreed to a full recount.

Official results put the Communists in front with close to 50 percent of the vote. The parliament elects the president, and the Communists appeared very close to securing the 61 seats they need in the 101-seat assembly to secure victory for their chosen candidate.

Most of the protesters are students who see no future if Communists keep their hold on the former Soviet republic of 4 million people -- located on the European Union's border but within what Russia sees as its sphere of influence.

The leaders of three opposition parties that won seats in parliament spoke to reporters after emerging from talks with Moldova's president and prime minister in the aftermath of protests that caused serious damage to government buildings.

"We must stop this violence," Dorin Chirtoaca, leader of the Liberal Party and mayor of Chisinau, said. "We must secure the right to a recount of all the votes. And we demanded the right to stage peaceful protests."

Vlad Filat of the Liberal Democrats said the opposition, which stands broadly for closer ties with neighboring Romania, was demanding the right to check all electoral lists.

"As a result of this, I can assure you that the elections were rigged and we will organize a new election."

Protesters overwhelmed riot police protecting both the president's office and the parliament -- located opposite each other on the capital Chisinau's main boulevard -- and poured into both buildings through smashed windows. They heaped tables, chairs and papers onto a bonfire outside parliament, and fires could also be seen in some of the building's windows.

Police were forced to retreat in disarray from attacks by protesters hurling stones and other projectiles.

They withdrew beneath riot shields as demonstrators pushed them from their positions. Some demonstrators were seen chasing police away after seizing truncheons and riot shields.

"The election was controlled by the Communists, they bought everyone off," said Alexei, a student. "We will have no future under the Communists because they just think of themselves."

Voronin has overseen stability and growth since 2001, but he has been unable to resolve an 18-year-old separatist rebellion in the Russian-speaking region of Transdnestr, where Russia has had troops since Soviet times.

Moldova is one of six former Soviet states with which the EU is due to launch a new program of enhanced ties at a summit in Prague next month.

EU foreign policy chief Javier Solana called on all sides to show restraint Tuesday.

"I call on all sides to refrain from violence and provocation. Violence against government buildings is unacceptable," he said in a statement.

Japan plans stimulus as export slide hurts

Japan plans to detail on Wednesday a $100 billion plan, around 2 per cent of GDP, to stimulate an economy deep in recession, as a tumbling current account surplus for February showed the toll from the financial crisis on exports.

The current account surplus halved from a year earlier as exports and earnings from overseas investments sank, highlighting the need to boost domestic demand in the world’s second-largest economy.

Lone Star stages Japan Reit rescue - Apr-08”The data show Japan’s economy continues to deteriorate. For the yen, returning to a surplus is a positive, because foreign investors saw last month’s deficit as a reason to sell the yen,” said Toru Umemoto, chief foreign exchange strategist at Barclays Capital Japan.

The Japanese government, struggling with the worst recession since World War Two, is putting the final touches on its fourth economic package in the past year.

The new package will add around $100 billion to spending already planned under previously announced stimulus measures, doubling the total to around 4 per cent of GDP.

Finance Minister Kaoru Yosano has said he hoped to announce details of the package on Wednesday, although the timing could be delayed if ruling party officials call for more spending.

Included will be the creation of a safety net for contract workers, measures to help corporate financing and increased spending on solar power systems, Yosano has said.

Measures to bolster the labour market may be welcome as Japanese manufactures have slashed payrolls in response to a collapse in exports.

The government will also fund an incentive programme aimed at encouraging consumers to buy energy-efficient electronics, the Nikkei business daily said on Wednesday.

Aside from the expected fiscal spending of over 10 trillion yen ($99.5 billion), the government will expand to 37 trillion yen the amount of funds set aside to aid companies reeling from a domestic credit crunch, the Nikkei reported.

”The size of the government’s economic package will be large. But a lot of steps will be safety nets so that alone will be unlikely to galvanise domestic demand,” said Susumu Kato, chief economist at Calyon.

Japan’s current account surplus fell 55.6 per cent in February from a year earlier, data showed on Wednesday, as exports wilted in the face of a financial crisis that is pummeling Japan and its export destinations.

The drop was smaller than the market median forecast for a fall of 57.1 per cent. The surplus of 1.1169 trillion yen compared with a market median forecast for 1.0776 trillion yen and followed a deficit of 172.8 billion yen in January.

The income surplus shrank 34.1 per cent, the biggest fall in nearly three years, as companies earned less from overseas securities and direct investment, the Ministry of Finance data showed.

Exports fell 50.4 per cent in February from a year earlier, more than a 44.9 per cent drop in imports. That led to an 80.4 per cent decline in the trade surplus.

The dollar edged down to 100.55 yen from 100.65 before the data and the euro slipped to 133.30 yen from about 133.60 yen beforehand.

The Japanese economy is expected to shrink 2.5 per cent in the first quarter of this year and 0.4 per cent in the second quarter, according to a Reuters poll.

That would mean five consecutive quarters of contraction, as a crisis spawned by losses on U.S. mortgage derivatives lead to a contraction in global credit and plunged much of the rich world into recession.

Tuesday, April 7, 2009

Monday, April 6, 2009

ECB rejects euro short cuts in east Europe

From the FT this morning:

The European Central Bank on Monday dismissed proposals for European Union states in eastern Europe to scrap their currencies and introduce the euro, without formally joining the eurozone.

The ECB was responding to the publication in the FT of plans by the International Monetary Fund for the area as part of a regional anti-crisis strategy. The FT report helped spark a modest rally in east European currencies on Monday as traders saw the IMF report boosting prospects for early euro entry.

Officials and commentators in the EU’s new member states were divided. Some suggested that while the idea might not be suitable for states with floating exchange rates, such as Poland and the Czech Republic, it might be right for smaller countries with fixed exchange rates, notably the Baltic states.

Miroslav Singer, Czech National Bank deputy governor, said the proposals could be appropriate for fixed-rate economies as long as the currency reserves were sufficient. “I fully agree with the IMF proposal, but I am worried that the EU and ECB are simply not willing to change their stance.”

The ECB insisted countries must adopt the euro in full and meet all entry rules. Ewald Nowotny, ECB governing council member, told Reuters: “This [IMF proposal] is not realistic. The membership for European monetary union has very clear rules and these rules have to be followed. From an economic point of view, it would not be a good signal [for] the confidence . . . towards the euro.”

The ECB has long said countries that wish to adopt the currency must bring inflation, deficits, interest rates and exchange rates into line and spend two years in the pre-accession Exchange Rate Mechanism II. Jean-Claude Trichet, the ECB president, told the European parliament in June 2007: “Euroisation is not a way to bypass . . . the checking of stability inside ERM II”.

Jean-Claude Juncker, prime minister of Luxembourg and chairman of the Eurogroup of finance ministers, has stressed that countries wishing to adopt the euro could not take short cuts. A eurozone finance ministry official said on Monday all eurozone finance ministers had discussed the issue in past months and backed Mr Juncker.

In Poland, Piotr Kalisz, chief economist for Citibank Handlowy, a commercial bank, said the proposals were best suited to “small economies like in the Baltic countries. For countries such as Poland and the Czech Republic, this would only be useful in the event of a cataclysmic crisis”.

Officials in Hungary and Romania reacted with scepticism to the IMF proposal. Adrian Vasilescu, an adviser at the Romanian central bank, said a swift move to the euro was “impossible”.

But Torbjorn Becker, director of Stockholm Institute of Transition Economics, said euroisation made sense for the Baltic states. “They’ve been aiming at that for a long time. This is just an issue of timing.”

Market analysts were sceptical. “It’s not realistic,” said Gabor Ambrus, an economist at 4cast, the London consultancy. “The ECB has said they they won’t take responsibility for the non-eurozone countries. Politically, it would also be difficult to sell to European voters.”

Additional reporting by Nikki Tait in Brussels, Jan Cienski in Warsaw, Thomas Escritt in Budapest and Robert Anderson in Stockholm

IMF urges eastern EU to adopt euro
By Stefan Wagstyl, Eastern Europe Editor

Published: April 5 2009 22:04 | Last updated: April 5 2009 22:04

Crisis-hit European Union states in central and eastern Europe should consider scrapping their currencies in favour of the euro even without formally joining the eurozone, according to the International Monetary Fund.

The eurozone could relax its entry rules so countries could join as quasi-members, without European Central Bank board seats, says the fund.

“For countries in the EU, euro­isation offers the largest benefits in terms of resolving the foreign currency debt overhang [accumulation], removing uncertainty and restoring confidence.

“Without euroisation, addressing the foreign debt currency overhang would require massive domestic retrenchment in some countries, against growing political resistance.”

Disclosure of the confidential report, prepared about a month ago, could reignite a fierce debate over strategies to assist central and east Europe.

Even though global leaders hailed last week’s G20 summit as a success, eastern Europe’s challenges remain. Amid deepening recession, Ukraine and Latvia, two states already in IMF programmes, have in recent days balked at approving IMF-mandated reforms. A third, Hungary, is struggling to create a government capable of implementing reforms.

The IMF report was compiled to support a campaign by the fund, the World Bank and the European Bank for Reconstruction and Development to persuade the EU and eastern European states to back a region-wide anti-crisis strategy, including a regional rescue fund. The campaign failed amid widespread opposition from both west and east European states.

Eurozone members also oppose easing the eurozone’s entry rules, as does the ECB.

The IMF, which forecasts a 2.5 per cent decline in regional gross domestic product in 2009, estimates that “emerging Europe” – including Turkey – must roll over $413bn in maturing external debt in 2009 and cover $84bn in projected current account deficits.

The report estimates that “the financing gap” – money needed from international financial institutions, the EU and governments – will be $123bn this year and $63bn next, or $186bn in total.

Much could come from the IMF. But the report says “up to $105bn” could be needed from other sources, including the EU.

IMF warns of strains exerted on east Europe
By Stefan Wagstyl

Published: April 5 2009 22:04 | Last updated: April 5 2009 22:04

It is just as well that world leaders saw last week’s G20 summit a success in the fight to overcome the global economic crisis. A stark report from the International Monetary Fund, disclosed in Monday’s FT, shows what a tough job they face in one key region – central and eastern Europe.

The analysis, which covers Turkey, as well as the former Communist states, sees gross domestic product plunging 2.5 per cent this year, against a 4.25 per cent growth forecast last autumn.

“The financial crisis is putting severe strains on the pre-existing vulnerabilities of emerging European economies . . . Credit losses at foreign subsidiaries of west European banks are threatening to start a vicious downward cycle . . . Regional currencies have come under pressure and tension among currencies is increasing,” says the report, which was written about a month ago.

The IMF yesterday did not respond to the FT’s request for comment in time for publication.

The report’s forecasts are at the gloomy end of market projections, but not off the scale. The authors estimate the region (excluding Russia because of its huge foreign exchange reserves) must roll over $413bn in maturing external debt this year and finance $84bn in current account deficits, with smaller amounts due in 2010.

The Fund assumes the rate of debt rollover will decline to 50 per cent for private debt and 90 per cent for sovereign this year with modest improvements in 2010.

On this basis, after allowing for other variables, the IMF estimates the region’s “financing gap” – the money that cannot be found in the market – could be $123bn in 2009 and $63bn next year, or $186bn altogether. The largest gaps are in Romania ($34bn), Turkey ($40bn) and Poland ($59bn), a country which has so far escaped the worst of the crisis.

The IMF can help close the $186bn gap with more than $81bn of its resources, based on individual countries’ quotas for IMF financing. Up to $105bn may be needed from other institutions, including the European Union, and from creditor governments.

“There are stark differences in how individual countries are positioned to withstand the crisis”, say the authors. They contrast Poland, the Czech Republic and others that “face no immediate funding needs” but might need future liquidity; with other countries inside and outside the EU that are already in IMF programmes, such as Hungary, Latvia and Ukraine, as well as those finalising programmes, for example, Romania.

The report warns that old EU members may not be immune saying: “A pro-active strategy will be needed to address problems in advanced EU countries that could be affected by the financial turmoil from a crisis in emerging Europe.”

The IMF highlights the vulnerability of states with large shares of domestic loans in foreign currencies – headed by Estonia, Latvia and Serbia.

The region’s banks, largely the subsidiaries of west European groups, could face non-performing loans of about 20 per cent of total loans, estimate the authors, though this could be conservative. West European banks, with regional exposure of $1,600bn, could see losses of $160bn. They might need $100bn in new capital – or $300bn in “a more severe full-fledged regional crisis”.

“Where this burden would fall and how it would be shared between advanced and emerging markets is an open and critical question.”

The report calls for pan-European action, involving the EU and the European Central Bank, even though Brussels and the ECB have expressed doubts about this and are following a country-by-country approach.

It says “a wider crisis could start with the collapse of one of the currency boards or pegs which look increasingly unsustainable”, referring to fixed exchange rate regimes of countries such as the Baltic states.

A region-wide response should include short-term liquidity support, macro-economic stabilisation, bank recapitalisation with the support of western European authorities, bank restructuring in eastern Europe and debt restructuring.

For EU members, the IMF also recommends euroisation – adopting the common currency even without formally joining the eurozone or gaining ECB board representation. This raises political and economic difficulties.

A new currency is the silver bullet that supposedly kills all economic ills. Panama, El Salvador and Ecuador have the dollar; Montenegro and Kosovo the euro. Now it has been suggested that central European members of the European Union not in the eurozone should unilaterally adopt the euro too. This, the International Monetary Fund believes, could help forestall a regional crisis so severe that euroisation may happen anyway. Better to pre-empt the inevitable and euroise now.

It is hard to see, though, what lasting benefits this would have. Eastern Europe’s main problem is its foreign debt. About 60 per cent of all Hungarian loans are in foreign currency; almost 100 per cent in Latvia and Estonia. Euroisation might help the whole region roll over the $413bn that falls due this year by making devaluation impossible. That would reduce the region’s immediate need for IMF funds. But that is all. The debt problem would still remain. It would just be redenominated.

A new currency is no guarantee of stability. If anything, it makes it more important to get other policies right. A euroised country can only expand its money supply through exports or capital inflows. As neither is likely at the moment, that means undertaking other adjustments. These would be painful and require the kind of flexibility most of eastern Europe lacks – except, perhaps, the Baltic states. When Ecuador first adopted the dollar, for example, the country was compared to an optimistic but overweight woman who had bought a dress two sizes too small. Ecuador is still trying to struggle into that dress.

There would be technical issues to solve – such as the exchange rate euroisers used when switching over. There would be political problems too. Unilateral euroisation would threaten the Maastricht treaty's integrity and diminish the credibility of the eurozone as a whole. Its one-size-fits-all monetary policy would be even harder to believe if a multitude of new Greeces sprang up in the east. Anyway, all of the economic reforms that euroisation would subsequently require can be done through programmes supported by the now richly-endowed IMF, and less painfully too. Euroisation is no panacea.

BACKGROUND NEWS Crisis-hit European Union states in central and eastern Europe should consider scrapping their currencies in favour of the euro even without formally joining the eurozone, according to the International Monetary Fund. The eurozone could relax its entry rules so countries could join as quasi-members, without European Central Bank board seats, says the fund. "For countries in the EU, euro-isation offers the largest benefits in terms of resolving the foreign currency debt overhang [accumulation], removing uncertainty and restoring confidence," it says in a report. "Without euroisation, addressing the foreign debt currency overhang would require massive domestic retrenchment in some countries, against growing political resistance." Disclosure of the confidential report, prepared about a month ago, could reignite a fierce debate over strategies to assist central and east Europe.

Struggling European Union countries in
central and eastern Europe should switch to the euro even without full
eurozone membership, according to a confidential report quoted by the
Financial Times on Monday.
The 16-member eurozone could relax its entry rules so the states could
join as quasi-members, without European Central Bank seats, the paper
cited the report as saying.
"For countries in the EU, euroisation offers the largest benefits in
terms of resolving the foreign currency debt overhang (accumulation),
removing uncertainty and restoring confidence," said the report,
written around a month ago.
"Without euroisation, addressing the foreign debt currency overhang
would require massive domestic retrenchment in some countries, against
growing political resistance."
The paper said the report had been prepared to support an ultimately
unsuccessful campaign by the IMF, the World Bank and the European Bank
for Reconstruction and Development to support a region-wide
anti-crisis strategy for the European Union and eastern Europe.
The report, covering eastern Europe, former communist states and
Turkey, expects a 2.5 percent fall in gross domestic product for the
"emerging Europe" region this year, compared to a 4.25 percent growth
forecast last autumn.
It said the region would have to roll over $413 billion of maturing
external debt in 2009 and finance $84 billion in current account
G20 countries agreed to boost IMF reserves to $750 million at their
summit in London last week to help emerging markets including those in
eastern Europe weather the global financial crisis.
In the last six months the IMF has pledged over $60 billion in loans
to the region, with Hungary, Latvia, Romania, Serbia and Ukraine among
those with programmes.

Thursday, April 2, 2009

Vote for early poll deepens Ukraine crisis

From the FT this morning:

Vote for early poll deepens Ukraine crisis

Ukraine’s parliament on Wednesday called an early presidential election setting the stage for a fresh stand-off in the former Soviet republic which has been plagued by poisonous politics and battered by recession.

The move to hold an election in October would cut months from the term of Viktor Yushchenko, who this week launched a bitter attack on Yulia Tymoshenko, the prime minister and his fierce rival, over her handling of the crisis. It would also prevent the president dissolving parliament, something he has repeatedly threatened amid widening rifts in the Kiev leadership.

Mr Yushchenko’s aides said the move was illegal and the president would appeal to the constitutional court. The process could take months to resolve.

Jorge Zukoski, president of the American Chamber of Commerce in Ukraine, said political turmoil was exacerbating an already difficult situation. “The business community continues to urge the political elites of Ukraine to focus their energy on re-engaging the [International Monetary Fund],” he said.

A $4.5bn tranche from the IMF helped stabilise Ukraine’s shaky financial system late last year. Additional disbursements have been delayed due to political bickering and Kiev’s failure to meet conditions such as cutting the budget deficit.

Mr Yushchenko’s popularity has sunk to single digits since he was propelled to power by the Orange Revolution of 2004.

The vote for early elections united Mr Yushchenko’s rivals, including the political camps of Ms Tymoshenko and allies of Viktor Yanukovich, the ­Moscow-leaning former premier. Both lead Mr Yushchenko in the polls, with 15-20 per cent backing, and are expected to square off for the presidency. The polls also show increasing support for Arseny Yatsenyuk, a young lawmaker .

Since taking over in 2004, Mr Yushchenko has pushed hard to break Kiev free of Moscow’s grip. He sought speedy membership of the European Union and Nato alliance but his attempts were brushed aside.

It takes some doing for an economy to shrink by a third. But that is what Ukraine managed to do in January and February compared with last year. Long the worst-managed economy among its central European peers, Ukraine has been savaged by the fall in steel and chemical prices, insolvent banks, and squabbles between Viktor Yushchenko, the president and Yulia Tymoshenko, the prime minister, a running stand-off that has paralysed policymaking. The country has a $16bn International Monetary Fund agreement to help it through – but disbursements have been held up by Ukraine’s inability to agree a budget. Without IMF money and the other funds that could follow, debt defaults are increasingly likely.

From financial crisis to economic crisis; from economic crisis to social crisis; and from there to political crisis: Ukraine’s woes are those of much of central Europe, only thrown into ghastly relief. Most forecasters expect the region’s economies to contract sharply this year, and possibly recover in 2010. That would follow the pattern of the most recent other emerging markets crisis, Asia’s meltdown in 1998. Emerging Asia, however, bounced back quickly thanks to steep devaluations, a growing world economy and western banks that were not on their knees.

That is hardly the case now. Indeed, emerging Europe's problems arguably have more in common with Latin America's debt crisis in 1982. Today, loans to central Europe by banks most exposed to the region account for 238 per cent of their capital bases, Citi estimates. That is half as much again as the nine biggest US lenders to Latin America in the 1980s. Yet it took a decade for the region's debt problems to be properly resolved, and it was four years before its economies were the same size as before the crisis began. A sobering thought - and one for Ukraine's fractious parliament to consider as it discusses legislation needed to get IMF money flowing again.

Wednesday, April 1, 2009

JPMorgan Global PMI Report March 2008

Data from the JPMorgan March Global PMI provide solid evidence that the speed of contraction in global manufacturing is lessening at the present time. Indexes tracking trends in output and new orders generally continued to rise across the globe, and are in general now up significantly from the series lows registered at the end of 2008. However, both the output and the new orders indexes remained at very low levels, all still signalling continuing contraction and well below those consistent with anything resembling a recovery in either component.

The JPMorgan Global Manufacturing PMI – which provides a single figure snapshot of operating conditions across the planet – posted 37.2 in March. Although substantially below the no-change mark of 50.0, the PMI was up for the third month in row and at its highest level since last October. The vast majority of the national manufacturing PMIs rose in March, including the US, Russia, Japan, China, most Eurozone nations and the UK.

This is however the most sustained period of contraction in the series history, and it still remains very unclear where we go from here. In general the drop in output reflects weak demand, with new orders declining for the twelfth month in a row. The trouble is, it is not at all clear where the rebound in demand that is needed for a recovery is actually going to come from.

Only last week the World Trade Organisation forecast a drop of 9% in the volume of international trade in 2009, and it is clear that in most economies output volumes continue to be hit by global as well as by local factors. That is what globalisation means, in effect, we are all interlocked.The rate of contraction in new export orders was severe, and in line with that seen for total order books.

When assesing the present situation, I think we need to keep three factors in mind: employment, inventories, and the massive stimulus packages which are being implemented.

On the employment front, the March data pointed to further job losses, as staffing levels were cut for the eleventh successive month, pointing to weakening consumer demand further along the road. The rate of decline moderated but remained historically high. All of the national manufacturing surveys for which March data were available reported reductions in employment. Denmark, the US and Czech Republic registered the fastest rates of decline.

As far as stocks go Global manufacturers continued to unwind their inventory positions in March. Stocks of purchases declined at the fastest pace in the series history. Among the national manufacturing sectors covered, only India reported a gain in input inventories. Even here, the rate of growth was marginal. So one of the reasons why output levels may bounce back slighly in the next few months is that inventory levels must now be quite low in many cases, and to some extent new orders will need to be met from production rather than from stocks. In addition, we are in the middle of the stimulus programmes, and it would be surprising if we didn't see some impact on manufacturing output from all that money being spent. Another question altogether would be whether any of this spending is capable of gaining traction. With consumers all over the developed world battening down the hatches for a long winter, and saving as hard as they can to put some order back in their balance sheets, it would be surprising if the stimulus packages on the scale we are seeing them were actually sufficient to turn all this round at this point. So the outlook is, a few months of easing in the contraction, and then more of the same.



Sweden's seasonally adjusted manufacturing purchasing managers' index rose to 36.7 in March from 33.9 in February, but the index remained below the threshold level for the ninth consecutive month in March, although this was the third consecutive month of improvement. In March, the production index rose to 38.8 from 34, while new orders index moved up to 35.1 from 28.8. The employment index increased to 31.1 from 30.1 and the inventories index rose 3 points to 39.6. Meanwhile, the prices index fell to 27.7 from 30.4.


The Markit Eurozone Final Manufacturing PMI for March rose from February's all-time low, up to 33.9 from 33.5. Thus the PMI signalled a marginal easing in the rate of decline from the previous month's record pace. Output showed the weakest decline for five months, and a smaller fall than the Flash estimate, although the rate of decline remained well above that seen prior to last October. With the exception of Italy, Austria and Greece, rates of contraction eased in each of the eight countries surveyed.

The Netherlands saw the smallest (though still steep) drop in production, while Spain saw the sharpest decline for the eleventh straight month. By product, investment goods producers reported the steepest fall in production for the third successive month, closely followed by intermediate goods producers. Consumer goods firms meanwhile reported the weakest rate of decline for the seventh consecutive month. Stocks of both raw materials and finished goods fell at record rates, as companies focused on lowering their operating capacity and controlling costs. The reduction in unsold goods stock was especially steep in Ireland, Germany and France.


Declines in German manufacturing activity continued to slow in March, however, activity in the sector continues to contract at a sharp pace, the research firm added.

The German manufacturing purchasing managers index rose to 32.4 in March, up one point from February's figure and in line with both preliminary estimates and expectations. March's increase marks the second consecutive month of improvement after PMI reached a 12-year low in January of 32.0. Nevertheless, the figure remains well in contraction territory, with the average taken across Q1 as a whole notably lower than the previous quarter's figure. According to the PMI report, manufacturing output and new orders continued to contract, albeit at a reduced pace, while employment fell at a record pace over the month. "The sector's performance in Q1 was at least as bad as Q4 and therefore points to another heavy fall in GDP," Markit senior economist Paul Smith said.


The pace of decline in Spanish manufacturing slowed in March but remained at the steepest contraction rate of any eurozone country. The PMI rose in March to 32.9 from 31.8 in February and thus further off from December's record low of 28.5. All the survey's main indicators remain far below the 50 level that divides growth from contraction. Output and new orders continued to contract sharply in March but at slower rates than recorded in the last six months, with panellists blaming falling demand as the principal cause as clients cut back on spending.

"The March PMI data suggests that the pace of decline in the Spanish
manufacturing sector has slowed," said economist Andrew Harker at Markit
Economics, adding that new orders and output indices are well above record lows
posted late last year.

But Harker was at pains to stress that the March figures should not be interpreted as any sort of sign of a turnaround in the Spanish economy. Unemployment in the sector continued to rise in line with falling output requirements as joblessness in the wider Spanish economy stood at 15 percent, the highest rate in the European Union. More than 34 percent of those surveyed by Markit said they had noted reduced employment levels at the end of the first quarter. Staffing levels have shrunken continuously since September 2007, according to the survey.

Slumping demand also hit input and output costs, which both dropped to series lows in March. Input costs fell as firms negotiated better prices from suppliers, while output prices fell as these savings were passed on to customers and as scarce business fuelled greater pricing competition.

Spain's preliminary harmonised inflation fell to -0.1 percent in March, according to government data on Monday, the first negative result for over 45 years as the deepening recession weighed on price gains.


Italy once again goes against the stream, since manufacturing activity fell in Italy at its fastest pace on record in March, with the manufacturing purchasing managers index falling to a record low of 34.6, down from February's 35.0 and suggesting an unprecedented contraction in activity for the sector. Weakness was widespread, Markit said in their report. Staffing levels were cut at a record pace as firms were forced to adapt to falling workloads and declining new orders. Backlogs of work also declined at their sharpest pace in the history of the PMI as falling demand meant firms to were increasingly able to complete outstanding projects.


French manufacturing output fell at a slower pace in March than in February, but but the outlook remained highly fragile as demand continued to suffer and firms stepped up job cuts. The Markit/CDAF manufacturing purchasing managers' index came in at 36.5 , well still below the 50 mark separating growth from contraction. The reading was, however, better than the record series low of 34.8 seen in February.

"Although output and new orders fell at slower rates in March, the latest PMI
data still point to severe weakness in the French manufacturing sector as the
slump in demand continues," said Jack Kennedy, an economist with Markit

Again, in a picture we get from one country after another, there was a sharp fall in inventories of finished goods. This suggests the overhang of unsold stock is diminishing, and once the destocking phase is complete, falls in production should ease for a bit, although I doubt such upticks will be enough to retart the economy given the depth of the current recession/depression. On the investment side, it was notable that those taking part in the survey said consumers and businesses were reluctant to commit to new spending.

The new orders index hit 34.3 in March from 30.1 in February, but remained deep in negative territory, marking its 10th consecutive month of contraction, according to the survey. Faced with dwindling levels of new business, firms worked through backlogs at a rapid pace, and slashed jobs to trim excess capacity, pushing the factory employment index to its second-lowest level in the series history, at 36.2.


The Greek Purchasing Managers’ Index fell to a new record low of 38.2 in March, reflecting a sharp drop in production, new orders, employment and inventories during the month. The markit economics monthly report said factory prices fell more rapidly in March, while import prices fell at a slower rate, a sign of further pressure in companies’ profits. The employment rate in the Greek manufacturing sector fell to a record low in the same month.

Eastern Europe


Hungary's manufacturing purchasing manager index eased by 0.2 percentage points to 39.5 in March picking up from an all-time low in February, according to the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM). The contraction of the manufacturing sector that started last October has continued, and its rate has even increased as compared to February.


In Poland, the index rose to 42.2 points, the highest in five months, from 40.8 in February. The decline in Polish industry decelerated for the third month in a row and was the least weakest rate since November. Markit said both new orders overall and new export orders continued to contract rapidly, reflecting weakening demand from western Europe, while employment fell to a new record low for the fastest rate of decline since the survey began in July 2001.

Roderick Ngotho, a strategist at UBS, pointed to German PMI data also released on Wednesday, which he said did not reflect a collapse in Germany factory orders and it was possible sentiment was "adapting to bad news". "Hence though still quite poor, it could be looking for a base in the poor side of the scale. This is different from sentiment being outright optimistic due to a positive change in global macro indicators," he said. "Without global demand picking up and with domestic demand generally weak, it is difficult to envisage a positive environment for industrial orders/output to pick up meaningfully in the near term."
The Czech Republic

The Czech Purchasing Managers' Index inched up to 34.0 in March from 32.6 in February and from the record low set in January. The Czech decline was also the least extreme in five months, but the first quarter as a whole still pointed to a much steeper rate of decline than the second half of 2008, said Markit, which compiles the PMIs.

The slower rate of contraction in March could, of course, be linked to the effects of the car-scrapping subsidies introduced in some 10 EU countries in January. Carmakers are the main drivers of economies like those in the Czech Republic and Slovakia, where leading global manufacturers have set up factories this decade. Both countries have seen their sharp declines in output ease in recent weeks. Some firms, including the Volkswagen unit Skoda, have recently hired additional workers and resumed full working weeks to handle the resulting surge in orders, the problem for these economies is that the subsidy effect may only last for several months.


Russian manufacturing contracted at the slowest pace for five months in March as companies reduced their stocks of unsold goods and the decline in new business eased, according to the latest PMI report from VTB Capital. The VTB Purchasing Managers’ Index was at 42 last month after a 40.6 reading in February. Stockpiles of unsold goods fell at the fastest rate since December 2005.

“Stocks of unsold goods declined which, combined with a sluggish contraction of the new business sub-index, suggest that the headline index may keep rising into the second quarter,” Dmitri Fedotkin, a VTB economist, said in the statement. Still, “no sharp recovery” in the index is to be expected.
The index showed contraction for the eighth straight month, a longer period of decline than the one registered in 1998, when the government devalued the ruble and defaulted on $40 billion of debt.

The manufacturing workforce shed jobs for the 11th month in a row, the longest period of contraction in the survey’s history, VTB said. “Firms reported that the redundancies resulted from lower workloads and the subsequent need to cut spare capacity,” it said in the statement.



China’s manufacturing industry shrank for an eighth straight month in March as collapsing global trade cut exports and growth across Asia. The CLSA China Purchasing Managers’ Index dropped to a seasonally adjusted 44.8 last month from 45.1 in February. So again, while the stimulus programme is slowing the rate of contraction, there is no sign of any expansion in China.

The manufacturing component of the index continued to increase, rising for a fourth month from a record low of 40.9 in November. The export orders index rose to 41.4 from 39.5 in February. New orders climbed to 43.6 from 44.2. Output gained to 44.3 from 43.9, while the employment index rose to 47.1 from 46.6, its second increase in eight months.

“A worsening of domestic manufacturing orders lies behind the drop in the PMI and accords with what we are seeing on the ground in the steel industry,” said Eric Fishwick, head of economic research at CLSA in Hong Kong. “Expect the production index to show softness in April......More encouragingly, export orders continue to improve,” he added “They are still falling but at the most moderate pace since October.”


Indian manufacturing activity contracted for a fifth straight month in March as demand remained depressed by the global economic downturn, although there were some signs of improvement, according to the report which accompanied the ABN AMRO Bank purchasing managers' index. The index rose to a seasonally adjusted 49.5 in February from January's 47.0, indicating slight signs of slight improvement after hitting a 44.4 trough in December, getting now very close to the reading of over 50 which signals economic expansion. "On the whole, it appears that business conditions in the manufacturing sector are gradually improving," said Gaurav Kapur, senior economist at ABN Amro Bank. Perhaps India's is the only manufacturing sector in the global economy which gives some indication of moving out of contraction and into recovery at this point.

Manufacturing, however, currently only makes up about 16 percent of India's gross domestic product. "It appears that domestic demand is picking up," Kapur said. "External demand, however, remains weak and contracted in March too, for the sixth consecutive month." The new orders index rose to 49.5 from 45.9 in February.


United States

Manufacturing in the U.S. contracted for a 14th straight month in March as factories kept on cutting production, though a spike in new orders and the lowest inventories since 1982 indicate the industry may be stabilizing to some extent, whether in the short term or the longer term remains to be seen. The Institute for Supply Management’s factory index rose to 36.3 last month from 35.8 in February. Still, the contraction is very pronounced at this point.

The ISM’s gauge of inventories fell to 32.2, the lowest since August 1982, from 37 in February. Even as manufacturers are pushing their inventory levels down ISM representatives stressed “we’re probably two, three months away from seeing significant improvement in new orders that would be driven by customer inventories coming in line.”


March data pointed to yet another weak performance of Brazil’s manufacturing economy despite the fact that the headline seasonally adjusted Banco Santander Purchasing Managers’ Index registered its highest reading since last October (42.2). Despite a slower contraction in output being recorded in March, the pace of decline remained substantial. The trend in production closely followed that of new orders, although another severe depletion in unfinished work prevented it from falling as severely. Stocks of finished goods were also lower than in February, and the latest data are consistent with a modest reduction in inventory holdings, with manufacturers frequently responding that orders had been met directly from existing stocks.

Input and output prices fell at series record rates during March. The drop in purchasing costs was only the second in the survey history, and reflected weak global demand for fuel and raw materials. Manufacturers passed these reductions on to customers, by way of lower charges, in an effort to remain competitive in a difficult market environment