Eurozone: Europe is bogged down with debt worries and austerity cuts, so a rise in oil prices could push more eurozone nations into recession. Eurostat reported last week that eurozone GDP contracted at a 1.3% annual rate in the fourth quarter. Italy contracted at a 2.9% annual pace last quarter, while Belgium, Greece, the Netherlands, and Portugal officially fell into recession with their second straight quarter of negative GDP growth.
These four eurozone countries are in a recession, and Italy is on the verge. Only France was able to buck the negative GDP growth by growing at a 0.9% annual pace in the fourth quarter.
Complicating matters further, insults are flying between Germany and Greece over payment of the second installment of the 130 billion euro ($171 billion) rescue package for Greece. Finland, Germany, and the Netherlands are pushing to delay Greece’s aid package until Greek political leaders make good on their promises for more austerity.
In the meantime, Moody’s Investors Service lowered its ratings or outlook on nine European countries last week: Austria, Britain, and France now have negative outlooks according to Moody’s, which means their credit ratings are in danger of downgrade in the next 12 to 18 months.
Asia: Japan looks like the “Italy of Asia.” On Monday, Tokyo announced a 2.3% drop in its fourth-quarter GDP, mrking the third time in the past four quarters that Japan has reported negative GDP growth. This was exacerbated by last March’s horrific earthquake and tsunami in Japan, as well as by the recent floods in Thailand, which have disrupted Japan’s supply chain. In addition, top executives at Nissan (PIN.K:NSANY) and Toyota (NYSE:TM) have complained that it has become virtually impossible to export cars from Japan at current exchange rates.
Last Tuesday, Japan surprised economists by expanding its asset purchase program (i.e., quantitative easing) by $129 billion in an attempt to stop the appreciation of the yen and to fight price deflation.
China has long been a prime engine of global growth, but to ensure continued growth, Beijing has instructed Chinese banks to embark on a mammoth rollover of loans to local governments, effectively delaying the debt overhang problem. China is a planned economy, so the central government is ultimately responsible for local debts. Since the principal on many of these loans is not repayable, Chinese banks have started extending maturities to local governments by up to four years to avoid a wave of defaults.
Speaking of China, Bloomberg reported Wednesday that China reduced its holding of U.S. Treasury debt by $31.9 billion in November (a 2.8% decline), reaching the lowest level of U.S. Treasury debt that China has held since June 2010. Beijing apparently does not want to hold so much low-yielding Treasury debt.