The latest news out of Asia is not good. On December 26 the Japanese government announced that factory output fell by more than 8% in November, the biggest drop in 55 years. Toyota—now the world’s largest automaker— expects to report its first annual operating loss since World War II. And Chinese exports are down over the past year, the first year-over-year decline since 2001.
What’s happening is that the global economic crisis is moving into its third stage. The first stage hit finance and housing. In the second stage, the downturn spread to the real economy in the U.S.
Now, with consumers cutting back around the world, the downturn has jumped to the exporting countries in Asia. And it’s not just China and Japan—countries such as Taiwan and Thailand are seeing sharp plunges in merchandise exports as well.
What’s more, there may be no easy answer: Without the housing and credit bubble in the U.S., there may be a long-term glut of global manufacturing capacity. The major exporting countries in Asia can produce far more electronics, clothing, and cars than their own populations can consume, at least for now.
The key question is: What happens next? One possibility is that fiscal stimulus—in the U.S. and around the world—will boost demand and get consumers buying again. Then the Asian factories can get back to work.
Alternatively, the global manufacturing glut will turn out to be real and persistent, even with the stimulus. Prices for imported goods will fall and fall and fall, because there are simply too many factories around the world. After all, how many flat screen TVs do we really need?
For workers in the U.S. who still have a job, this drop in prices could be a bonanza. But as factories around the world shut down, the result will be devastation in manufacturing-dependent regions.
In the end, it may turn out that the worst effects of the global economic downturn will be felt in countries which are dependent on manufacturing. China, especially, will find out how much of its economic boom was real, and how much was credit-fueled. The answer may not be pretty.