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reflections

Oct 31, 2008 | 02:31 GMT

4 mins read

Geopolitical Diary: Third Quarter GDP in Geopolitical Perspective

It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.
Figures for third quarter U.S. gross domestic product (GDP) have come in, and they show the economy has contracted by 0.3 percent. This is not the final number; there will be two additional revisions in the coming months that can alter this figure substantially. Therefore, the economy may not have contracted at all, or it may have contracted more than reported. For the moment, however, the United States is in recession. As we have commented before, there is no possible argument as to what a recession is. It is when GDP declines. If it declines for two quarters, the economy is in recession for two quarters. If it doesn't decline, we are not in recession. We point that out to avoid metaphysical discussions on the nature of recessions. What is most striking — at least about this preliminary figure — is how small the number is. Given that the subprime crisis has been with us in various forms for more than a year and its various spinoffs all through this quarter, it is striking that we have not seen declines in excess of 1 percent. Certainly, the system has decelerated. Second quarter growth was more than 3 percent, so we have slowed down by more than 3 percent annualized. We hit the brakes. At the same time, it gives us a sense of how strong the underlying economy was. A deceleration of more than 3 percent left the economy barely in recession — and that was with the double hit of the financial crisis and high commodity prices. We can expect an additional slowdown this quarter, probably along the lines of the 1-2 percent contractions we saw in 2000-2001. But even that is unclear. The real hit from the financial crisis came in October, and it leaves two full months for some amelioration as credit eases a bit. At the same time, oil prices have plunged, and that has removed some pressure on the system. The geopolitical point is this: The crisis is routinizing itself. We mean by this that the economic pattern — as opposed to the financial — is taking a recognizable form. We have slowed somewhat more rapidly than normal, but commodity prices have plunged early in the piece. We would expect bad numbers in the last quarter, but possibly not as bad as some have said. The problems will persist through the spring, but we should see recovery in the summer. We are in recession, and it looks pretty much like what we saw in the past two recessions. It certainly doesn't look anything like the 1970s. Interest rates aren't through the roof, and we don't have double-digit unemployment and inflation. So in trying to benchmark this process, the United States is behaving better than most expected, and in line with what we have seen in the past. The two things to watch now are China and Europe. When the Americans catch cold, the Chinese catch pneumonia. They are extremely dependent on American consumption, and a recession is going to pressure their economy. It will be important to watch Beijing's management of the Chinese economy — especially of unemployment — in the face of an American slowdown. The Europeans have created their own, proprietary financial meltdown in Eastern Europe. By expanding their banks in Europe outside the eurozone, the Europeans lent money — especially mortgages — to Hungarians, Romanians and others denominated in euros and Swiss francs. As the euro appreciated relative to the local currency, the cost of these loans soared and the ability of borrowers to pay them back declined. Banks assumed currency stability. They assumed wrong, and this will be a crisis with geopolitical implications.

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