Disquieting News From Across The Pond

The world didn’t quit spinning today despite all of the attention paid to the Geithner Plan. Some disquieting news came from Europe.

Germany, the big dog of the EU is looking at a 7% contraction of GDP this year. The country’s dependency on exports is having a telling effect.

The country may be on the cusp of a Japanese-style “Lost Decade”, according to a clutch of grim forecasts by leading banks and economic institutes.

Commerzbank said output is likely to contract by 6pc to 7pc this year as the global recession wreaks havoc on German industrial exports. Foreign industrial orders have fallen by 37pc over the last year.

“The recent collapse in orders compels us to make a massive downward revision to our economic outlook. January orders and production data plunged at a dramatic pace that has no precedent in Germany’s post-World War Two history,” said Jörg Kramer, the bank’s chief economist.

The country’s leading think tanks have been scrambling to adjust as it becomes ever clearer that the country went off a cliff over the winter. The IMK Institute has slashed its forecast to minus 5pc this year. The RWI Institute warned that unemployment could reach 5m by the end of 2010 as the delayed time-bomb of mass lay-offs finally detonates.

The cratering of the German economy is certain to put increased pressure on the ECB to cut rates. Though it continues to claim otherwise, the central bank has been behind the curve in cutting rates and hamstrung in terms of employing the other measures adopted by the Fed and Bank of England. The economy is also certain to be a major issue in this Fall’s elections in Germany.

Meanwhile, the U.K. is about to enter dangerous territory. It may well be officially in a deflationary environment tomorrow.

Deflation will officially return to Britain today after an absence of nearly 50 years, when government data is expected to show that the retail prices index – the country’s broadest measure of inflation – has turned negative.

After the indicator barely scraped over zero to 0.1% in January, another month of tumbling interest rates, collapsing house prices, and lower gas and electricity charges is expected by economists and City experts to have pushed February’s figure to about -0.8%.

Though government sources say public-sector pay is unlikely to be cut, a sustained period of deflation would spell bad news for millions of public and private-sector workers whose pay deals are pegged to the inflation indicator. Students who took out loans before 1998 could benefit from lower interest payments, however.

Economist think the RPI could go as low as -4% this year and they fear it could stay below zero for up to a year before the combined stimulus the economy is receiving from the weak pound, the Bank of England’s quantitative easing and a fiscal easing push it back up again.

This is the nightmare that Bernanke has fought so hard to avoid. Once embedded in the economy it is devilishly hard to rid.

With all the euphoria over Geithner’s plan we might well be advised to remember just how tight a system we live in. There are any number of developments that could overwhelm whatever progress we might make domestically. These two are serious and pose substantial risks for the U.S. Ultimately, our economy is so tightly correlated with economic developments elsewhere that our fate is somewhat beyond our direct control.

more: here and here

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