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The banking meltdown seems to have been coming to an end but there are no signs yet that the consequences for the real economy have yet fully emerged.
New profits warnings and hefty job loss announcements are released daily, and the pace of the decline in the real economy is accelerating. Yet most policymakers continue to predict that the recession that has already begun may be less severe than previous downturns since the second world war.
This seems implausible, to say the least. There is a fair degree of acceptance that the financial crisis is at least comparable in scale with the crash of 1929, which led to the Great Depression. Perhaps enough was learnt then to ensure that policymakers can avoid the mistakes made in the 1930s and mitigate the consequences of the turmoil in the markets - but believing that requires a great deal of optimism.
Short recession
Certainly what has happened so far is nowhere near as serious as what happened after 1929. However, events in the past few weeks suggest there is much worse news to come - news that has barely been factored in to predictions about a relatively short recession.
The sharpness and increasing severity of the deterioration in the real economy is already shocking many business executives and investors. In important industries, such as carmaking and retailing, a similar tale is told - third-quarter performance appeared to be on or close to target, or at least to last year's figures; but when the banking system threatened to plunge into meltdown in September, sales went off a cliff.
This has been the story behind the flood of profit warnings saying that the fourth quarter will be so dire that full-year results will miss market expectations by large margins. However, the decline has continued to worsen, making repeat profits warnings increasingly common.
GKN, the UK engineering group that makes motor and aerospace components for manufacturers round the world, is a good example. For the first nine months of the year, sales were up on 2007 and profits marginally ahead. Less than four weeks ago, however, the group said it now expected sales in automotive in the final three months of 2008 to be 15 per cent below last year and predicted profits this year would be down 20 per cent.
Last Friday, the group issued a second warning that production for the last two months of the year would be 20 per cent lower than previously expected because of a "significant" decline in business in the past seven days.
At the end of September, Craig Barrett, chairman of Intel, told the Financial Times that it was difficult to see how such a unique financial crisis would hit the information technology industry. But he said there was at least a chance that it might boost investment in productivity - in the past, the business had improved during financial slowdowns.
Last week, however, the chipmaker shocked Wall Street when it warned that revenues for the fourth quarter were now expected to be 14 per cent lower than forecast in October. The truth is that no one in business has lived through a financial crisis such as this, so top executives and their advisers have no experience to draw on in evaluating the prospects.
Job losses
The withdrawal of trade credit and trade insurance is seizing up supply chains, while customers - corporate and individual - either cannot borrow money to fund purchases or prefer to use whatever cash they generate to reduce borrowings. We are operating in uncharted waters and, since there is no reason to believe that conditions will improve in the next few months, it is hard to avoid the conclusion that more bad news will emerge.
Meanwhile, announcements of job losses may be underestimating the labour market impact of the recession. Companies such as GKN that have built flexibility into their operations are getting rid of contract and agency workers who may not appear in the unemployment statistics immediately.
Further deterioration in sales will lead to much deeper cuts affecting directly employed staff.
Nor is there much comfort in the hyperactivity of policymakers, recapitalising banks, bailing out insurers, cutting interest rates towards zero and turning on the public spending taps. This is pushing at a piece of string, with no certainty that enough will be moved at the far end to stem the decline.
In the present mood of panic, much of any extra money pumped into the economy will be used to reduce debt or build up savings. A lot of the rest will be spent on imports that will benefit the economies of other countries, which may be less able to reciprocate.
The conclusion of this gloomy analysis is: while the real economy might begin to improve next year, it would be foolish in the extreme to rely on it. The odds must be that there is more bad news to come, as non-financial businesses come to terms with the consequences of the credit crunch. Right now, the speed with which that bad news is emerging is accelerating, with no sign of an early end.
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