Media reports on the latest release of official 4th quarter US GDP figures have concentrated on the headline revision of the annualised rate of decline of GDP from 3.8%, in the first published estimate, to 6.2% in the new one. It has also been stressed that this decline was significantly worse than the average of independent projections - which was for a 5.4% annualised fall.
However concentration on the headline GDP figure has distracted from examination of the detailed trends of the components of GDP, some of which are of very significant magnitude.
Until now the apparent ‘paradox’ of the international financial crisis was that, as Key Trends in Globalisation has analysed, the decline in financial markets was entirely comparable in rapidity to 1929, however the decline in the productive economy was far less severe than after 1929.
Such a paradox is highly unlikely to be maintained. The first possibility is that it will be shown that financial markets had overshot, that their decline is excessive, that there will not be anything approaching a post-1929 scale fall in production, and consequently financial markets will adjust back upwards – i.e. the variant that there will be an economic recession not a depression. An alternative is that it will be found that the 1929 scale financial falls are justified, and that it is merely a matter of a delay in time before the productive economy adjusts very severely downwards by the amounts that would justify a 1929 scale financial fall – i.e. the perspective not simply of a recession but of something approaching an economic depression.
The significance of the details of the 4th Quarter US GDP figures is that the rates of decline of components of GDP indicate that there is now a higher possibility of the second variant.
Such a trend does not, of course, necessarily imply that the scale of decline in US GDP will be the same as in the Great Depression - when GDP fell by 29.7%. But it would mean falls far exceeding in magnitude any post-World War II recession – the most severe recession in post-war US history being 1981-82 when GDP declined by 1.9%.
According to the new data, in the 4th quarter of 2008 US GDP declined at an annualised rate of 6.2%, consumer expenditure declined at an annualised 4.3%, private fixed investment fell at an annualised 20.8%, exports declined by an annualised 23.6%, and imports dropped at an annualised 16.0%.
The decline in US investment was not accounted for solely by the fall in the residential sector, produced by the sub-prime mortgage crisis, as the latter dropped by 22.2% - only marginally more than the overall investment decline.
To grasp the scale of magnitude of such rates of decline it is worth making a comparison to the actual falls in 1929-30 in the US – i.e. in the first year of the onset of the Great Depression. In that year US GDP fell by 9.4%, consumer expenditure by 6.7%, private fixed investment by 23.4%, exports by 15.4% and imports by 11.0%.
Comparing the two sets of figures, the annualised decline in US GDP in the fourth quarter of 2008 was about two thirds as rapid as the actual yearly decline in 1929-30 and the fall in consumer expenditure was similarly about two thirds of the first year of the Great Depression. But the rate of fall in investment in the 4th Quarter of 2008 was almost as severe as in 1929-30 and the rate of fall in US exports and imports was actually worse than in 1929-30.
Having made such a comparison it is necessary to state immediately that an annualised rate of decline is not the same as an actual annual rate of decline which has occurred as in 1929. It remains to be seen what will be the actual drop in US GDP during 2009. However the rates of decline of US investment, exports and imports in the last quarter of 2008 were fully comparable to those in 1929-30.
Other international data which goes in the same direction of post-1929 scales of fall are the extremely rapid rates of decline in Asian trade and industrial production. Exports by Japan, for example, dropped by 45.7% in January 2009 compared to a year earlier and its industrial production was down 30.0% over the same period. While these figures are undoubtedly exacerbated by the slowdown in the whole Asian economic region caused by the Chinese lunar New Year festival falling unusually early this year, in January, nevertheless anything approaching such scales of decline are figures fully comparable to 1929.
In short, elements are now appearing in the productive economy of a number of countries which overcome the’ paradox’ of the gap between the rate of decline of financial markets and the rate of decline of the productive economy in the negative variant – i.e. by the onset of declines in the productive economy of post-1929 magnitudes. Such trends are, of course, only just appearing and as yet are not consolidated. However the appearance of such tendencies clearly means that governments, policy makers and companies should not be seeking to minimise the gravity of what is taking place. It is more imperative at present to prepare for worse case scenarios than optimistic ones.
Talk simply of ‘recession’ is misleading. The issue is whether what will take place will be ‘merely’ the most serious recession since World War II or whether an actual economic depression will set in.
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Antai College of Economic and Management at Jiao Tong University in Shanghai provided research facilities for this study.
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