The Second Great Depression Spreads

The Second Great Depression has now taken a firm hold of Eastern Europe and seems to have just spread from Ukraine, and arrived in Hungary.

Hungarian industrial production fell the most in December since at least 1991 as a recession in western Europe cut export demand and dragged the economy into its worst decline in 15 years. Production dropped 23.3 percent from a year earlier, the seventh consecutive monthly decline, after falling 9.9 percent in November, the Budapest-based statistics office said, based on preliminary data. Output fell 14.6 percent month on month.

And it only looks set to get worse, since Hungary's manufacturing purchasing manager index (PMI) fell to a all-time low of 38.6 in January, down from 40.8 in December. Any PMI index figure above 50 indicates expansion while a figure below 50 shows contraction in economic activity. The index hadn't been below the critical 50 mark for more than three years before it dropped below (to 42.6) in October last year. Gábor Ambrus, economist at 4Cast, in London, estimates that (in part as a result of the gas crisis) output could drop by another 14.6% between December and January, which will give another huge drop in the year on year number.

“What can I say, just terrible. It appears to be weak on both domestic and external sides, but with Hungary a small open economy it is likely to remain under pressure from contracting demand across the globe and the Eurozone in particular......This isn't just a Hungarian phenomenon however, as German IP today will be weak as will the UK data, albeit not as soft as this number. The business surveys remain weak so it's difficult to forecast any near term recovery. Consequently, the estimate for GDP growth of -3% this year may soon look on the optimistic side."
Stuart Bennet, Caylon, London

VTB GDP Indicator Also Shows Severe Contraction In Russia

Well, while a lot of people in the Russian establishment seem to be busying themselves trying to decide which side they are batting for in the massive crisis which has now gotten a grip on Russia, the economy itself - which is basically being starved of liquidity in a way which is pretty reminiscent of what is happening in Spain - is now spirally downward and downward. The most recent piece of evidence for this comes from the latest reading on VTB’s Russian GDP Indicator which showed that economic output contracted at a year on year rate of 4 percent in January, down from December’s 1.1 percent decline, and November's 2.1 percent expansion.



According to Russian economy Ministry estimates the economy will contract by only 0.2 percent this year after expanding 5.6 percent in 2008, so this estimate now seems hopelessly out of date. If we look at the monthly contraction rate as a reflection of the current quarter on quarter contraction, we find a rate of minus 1.6%, which means that the present rate is something like a 6.5% annualised shrinkage rate. At present this is stationary and not accelerating, but it is quite strong, especially for an economy which only six months ago was expanding at a 6.5% annualised rate.

But Spain - Not Wanting To Be Left Out Of This Great Race To The Bottom - Isn't Far Behind

Spanish industrial production fell by a record 20 percent and bankruptcy proceedings almost quadrupled as the credit squeeze pushed the country’s debt-laden economy toward its worst recession in half a century. The 19.6 percent annual decline in production at factories, refineries and mines in December followed a revised contraction of 15.3 percent in November, adjusting for the number of days worked, the Madrid-based National Statistics Institute said today. The number of Spanish companies starting bankruptcy proceedings in the fourth quarter rose to 960 from 260 a year earlier, a separate report showed.

“It’s like a cluster bomb,” Salvador Bellido, president of the Confederation of Small- and Mid-Sized Companies, said in an interview. “Even the food sector, which shouldn’t really be suffering in such a situation, is suffering.” Spain’s auto industry, which accounts for about 5 percent of GDP, has started laying off workers as sales plunge. Nissan Motor Co. said it would cut 38 percent of workers at a Spanish factory and Renault SA won approval to temporarily lay off as many as 10,311. Vehicle production dropped almost 48 percent on an unadjusted basis in December, today’s report from the statistics institute said. The government has pledged 800 million euros in aid to help the industry weather the crisis. “There will be more mass job cuts in the industrial sector in the coming months,” said Jesus Castillo, an economist at Natixis in Paris. “The year 2009 is going to be a difficult one.”

In spite of a slight improvement between November and January (to 31.8 from 28.2), the latest manufacturing PMI data are consistent with a marked decline in industrial production. However, the pace of the fall is likely to slightly decrease in the coming months.These results confirm the extent of the Spanish recession. The contraction in activity should be more pronounced than expected in Q4 2008 (-0.8% q/q, published on February the 12th). More generally, GDP is likely to fall by more than 3.0% in 2009, after +1.2% in 2008 and +3.7% in 2007.
PNB Paribas