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Overview of countries effected by credit, liquidity and inflation; recession conditions – Japan, Spain, Iceland

Posted by Adrian on March 28, 2008

There is now a growing list on countries that have been effected and are currently being effected by the global credit crisis, liquidity crisis and inflation. The press is slow in reporting, but from time to time an article will appear in a financial publication whether online or in print of various countries that are struggling in tandem with the US economic woes. If other countries (outside from the US) are any indicator, or bellwether to a global economic downturn; all indicators are suggesting that this is going to be synchronized as a harsh global bust.

Apart from the US, that has filled the press with the invertible economic situation. Other countries have also appeared to hold a similar problematic situation, or are vulnerable to the tightening of the credit markets, which in turn is effecting the local financiers (Banks). Not to forget inflation, which in someways is being overlooked (not by the populations though) – which will destroy a countries wealth capacity even faster. The list below will be tracked by morbius glass, the US economic situation is obvious and dire, so this won’t be looked at with these blog posts (but tracked in the other posts) .

The countries (Japan, Spain and Iceland) below are shown as coupling to the current US economic recession.

Japan

Japan as the worlds second largest economy, is almost intrinsically joined to the hip on the US economy. With the US in recession and eventually moving into a harsh prolonged recession. Japan is showing the signs of it’s own vulnerability. Although exports have been picking up, namely to China and Russia on the back of car and other durable export’s. But it must be noted that the Japanese economy has suffered from years of deflation (hence interest rates being so low at 0.5%), the economy has struggled with growth and job creation, also should be mentioned that Japan has a stagnated wage growth. In some ways, the tipping of the US into recession will only further slow and already slowing Japanese economy. Japan could already be within recession bounds. So mixed with a possible beginnings of a recession, Japan (like the rest of Asia) is suffering from rising costs of food and oil.

The Japanese stagnant labour growth is at it’s 3 year low of 60.4% below average to most developed nations.

Spain

Spain has been covered in morbius glass, there have been brief flashes of media coverage of Spain. But the outlook is always the same. A massive property boom, inflated and tight rental market, particular Barcelona – now on the verge of collapse.

The Spanish housing bubble grew significantly between 1997 and 2007, at the same time as most developed nations property booms. Wolfgang Munchai for the Financial Times 8 March 2008 has written an excellent overview of the Spanish economy, particular the housing situation, some exerts from that article,

“I have become a collector of scary housing statistics of late. One of my favourites is a chart from the Bank of Spain, which shows that building approvals and permits* have fallen off the edge of a cliff since the end of 2006. At their peak, building permits were rising at an annual growth rate of 25 per cent. In the autumn of 2007, their annual change was minus 20 per cent – probably still going down. House prices have not fallen nearly as much, but this is only a matter of time, as sellers tend to suffer from a collective delusion at this stage in the housing cycle.

Between 1995 and last year, Spanish house prices tripled in nominal terms, and doubled in real terms. Several explanations have been offered: a trend for young people to leave their parental homes earlier; a rise in immigration; and the country’s popularity among northern European homebuyers. But beware of demand-side arguments. They are usually cyclical, and the cycle is just turning. Also, as supply increases with demand, there is now a glut of unsold homes.”

he goes on to give the example of falling of GDP with falling equity prices on property, in respects to the Spanish market and equity withdrawal on homes

“When house prices fall, GDP will be hit in two ways: the first is the direct effect of a fall in construction investment, and the second is the indirect consumption effect, as people cannot extract new liquidity from their homes, which they could use for consumption spending. If the construction sector’s share of GDP were to shrink to 10 per cent gradually over a period of, say, four years, the direct effect on growth would be close to 2 percentage points per year.

Add the consumption effect from lower house prices, and you easily get a half-decade of zero growth – perhaps longer, perhaps worse, perhaps both.”

and in regards to the Spanish banks,

“Spain has a modern and robust banking sector that has avoided some of the pitfalls of modern credit markets. Yet Spanish banks will have problems once mortgage default rates are rising. And in terms of structural reforms, Spain ranks low in league tables on product market and retail regulation, and in terms of competition policy.”

I would add the inflation spectra to falling equity as a speedy decent into a recessionary conditions. Spain, with a collapsing property market, no matter how cashed up the banking sector is (sounds like Australia) will be reluctant to lend out money on falling equity markets. Inflation and credit tightening with a receding property market – is a death throe for any economy. Spain is showing all the indicators of an economic meltdown.

Iceland

This has been sudden for Iceland, the main contributor for a pending economic ‘crisis’ is the funding problems for banks as the credit markets becoming tighter. The currency has collapsed and the Icelandic banking sector is on the verge of insolvency, from Financial Times 25th March 2008,

“The bank said “deteriorating financial conditions in global markets” had contributed to the emergency move. Confidence in the krona, Iceland’s currency, has been shattered this year because of perceived economic imbalances in the economy and fears the banking sector is in danger of collapse. The krona has weakened by 22 per cent against the euro so far this year.”

Regarding banking stress, inflation

“The bank last raised rates in November 2007 and said then it would leave them unchanged until the middle of this year, but was prepared to take extraordinary action if the krona depreciated severely. Inflation was 6.8 per cent in February and has outpaced the central bank’s target of 2.5 per cent since 2004.

“It will be necessary to continue to pursue a very tight monetary policy in order to bring inflation and inflation expectations under control, and increase confidence in the krona,’’ the central bank said. Thor Herbertsson, co-author of an influential report in 2006 on Iceland’s economy with Fredric Mishkin, a member of the US Federal Reserve board, said Iceland could be thrust into crisis as a result of the global economic situation. “Let’s say Iceland is not in more danger than some Wall Street banks,” he said.

morbius glass blog will keep updates on the countries covered in this post.

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8 Responses to “Overview of countries effected by credit, liquidity and inflation; recession conditions – Japan, Spain, Iceland”

  1. […] by Adrian on March 31, 2008 Overview of countries effected by credit, liquidity and inflation; recession conditions – Japan, Spa… – Update […]

  2. […] by Adrian on April 4, 2008 Overview of countries effected by credit, liquidity and inflation; recession conditions – Japan, Spa… – Update […]

  3. […] by Adrian on April 15, 2008 Overview of countries effected by credit, liquidity and inflation; recession conditions – Japan, Spa…- (update […]

  4. Inder P Singh said

    How are some of the other major economies e.g. China and India faring with respect to the ones mentioned in this post?

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  8. youtu.be said

    You really make it seem so easy with your presentation but
    I find this topic to be really something that I think I would never understand.
    It seems too complicated and very broad for me.
    I’m looking forward for your next post, I will try to get the hang of it!

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