Altınbaş Capital

[Jay]

 

[Jay]

Between March and April 2007, the global economy has entered a global recession that has created conditions likely pointing to a depression. Virtually all major economies are reporting double-digit contractions in real GDP, in some cases exceeding 60%. The global downturn is broad-based, indiscriminate in its reach, and severe in scale.

Although the aggregate world economy continues to expand in real terms when measured against the longer baseline with global GDP outperforming by $44 billion, the most recent monthly data highlight a profound divergence: monetary expansion at the global level is still supporting liquidity, but national economies are fracturing under the strain of collapsing demand and internal fiscal imbalances.

The contraction is not uniform:

• China and Thailand, despite historically strong GDP levels, are experiencing dramatic contractions of 66.7% and 56.2% respectively, raising concerns that even previously resilient high-growth economies are reaching structural breaking points.
  
  
• The United States, while less severely contracted than China, still faces a staggering -38.7% decline in output, despite retaining a top-tier AAA rating.
  
  
• Poland and Spain stand out as relative stabilizers: their contractions are mild compared to peers (-7.6% and -5.6% respectively), suggesting possible pockets of resilience within Europe.
  
  
• Sovereign finances are fraying rapidly. Türkiye's deficit of $71.2 billion is the largest globally, while Thailand (-$27.0 bn) and China (-$16.6 bn) are also registering substantial shortfalls. Myanmar has joined the other four major Asian economies by recording a public deficit of (-$20.4 bn)

Despite these deficits, most sovereigns are maintaining positive state budgets, indicating that fiscal revenues have not yet collapsed outright, though the sustainability of this balance is questionable if contractions persist globally and credit begins to dry up.

Key Observations

1. Synchronized Global Depression
All surveyed economies are in open depression, with real GDP declines ranging from -5.6% (Spain) to -66.7% (China). This breadth of contraction implies systemic causes rather than idiosyncratic shocks. The global downturn is consistent with monetary overexpansion producing inflationary distortions in prior months, now followed by a violent real-side correction.

2. The Case of China

China’s contraction of two-thirds of GDP within a single month represents the most dramatic decline on record. The public deficit of $16.6 billion confirms the depth of fiscal strain. While absolute GDP levels remain substantial, the sudden collapse in output indicates that the model of heavy export dependence and investment-led growth has failed under current systemic stresses. Cracks in the Chinese fiscal foundation are widening, posing the single largest systemic risk to the global recovery trajectory.

3. Thailand: From Resilient to Fragile
Thailand mirrors China in that it combines a historically strong GDP with a sharp contraction (-56.2%) and a large public deficit ($27.0 billion). The simultaneous erosion of output and fiscal strength suggests the country may be among the first in Asia to face debt sustainability questions, even if its AAA rating has not yet been revised downward.

4. United States: Managed Decline
The U.S., with GDP down -38.7%, remains in depression yet retains an AAA rating. This reflects both relative resilience (its contraction is severe but not catastrophic compared to peers) and the privileged status of the U.S. dollar as global reserve currency. Dollar circulation has continued to expand even amidst contraction, cushioning domestic collapse and helping maintain investor confidence.

5. Relative Stability in Europe

Smaller economies such as Spain (-5.6%) and Poland (-7.6%) show relative resilience, potentially reflecting structural or policy buffers that allow them to weather the broader downturn more effectively.

However, Europe’s largest economies are experiencing severe contractions. Germany (-65.5%), Sweden (-65.34%), and the United Kingdom (-65.7%) have all seen dramatic declines in real GDP. Despite these contractions, these states maintain the continent’s largest state treasuries and pools of financial capital, positioning them as pivotal actors for regional stabilization.

The combination of massive fiscal reserves and collapsing output creates a significant challenge: governments hold more monetary resources than the productive capacity of their economies, exacerbating inflationary pressures if liquidity is released without corresponding increases in real economic activity.

France and Italy saw their GDPs remain effectively unchanged over the period, indicating a temporary stability that contrasts sharply with the deep contractions elsewhere. While this may offer some localized resilience, their lack of economic growth means that the lack of change may be more devastating.

6. Lending Crisis & GDP outpaced
Recent data for the United States, Korea, the United Kingdom, and Sweden reveal a paradoxical fiscal situation: each government is holding between $40–60 billion in treasury reserves, yet their real GDPs have collapsed to levels far below those balances. For example, the U.S. reports a State Treasury balance of $53.1 billion, while its GDP has fallen to $18.65 billion following a 38.7% contraction. Similarly, Korea, the UK, and Sweden all record treasuries in excess of $40 billion, while their domestic outputs range from only $3.6–6.7 billion.

This imbalance reflects two interrelated issues:

1. Liquidity Hoarding and Credit Paralysis
   Despite substantial fiscal reserves, governments have refrained from deploying these funds into the economy through lending or stimulus. This has produced a contraction in credit availability, depressing investment and consumption, and deepening the downturn.
   
   
2. Monetary Overhang and Inflationary Risk
   With treasuries holding reserves greater than their economies’ annual outputs, the ratio of “idle money” to real production is dangerously skewed. If these funds were suddenly released into circulation, the result would be rapid price escalation. Already, the disconnect between money balances and productive capacity is creating inflationary pressures, as nominal liquidity growth far outpaces real economic activity.

The paradox is that inflation and stagnation are occurring simultaneously: economies are shrinking in real terms, yet monetary expansion, unmatched by lending or productive investment, is driving up prices at home. This “stagflationary depression” presents significant concerns for long-term stability.

Without a recalibration of fiscal policy to convert reserves into productive growth, these economies face the dual risk of eroding purchasing power and further output collapse, with the potential for sovereign credibility to weaken if markets begin to doubt the utility of such hoarded reserves.

7. Fiscal Strains and Public Deficits

• Türkiye leads in fiscal deterioration, with a deficit of $71.2 billion, far exceeding its peers.
  
  
• Thailand and China follow closely with deficits of $27.0 billion and $16.6 billion.
  
  
• Despite these imbalances, governments still report positive state budgets, an anomaly suggesting that tax revenues remain high relative to expenditures, at least on paper. This discrepancy raises questions: either fiscal reporting lags reality, or extraordinary measures (including emergency levies or one-off revenues) are temporarily masking deeper insolvency risks.

8. Risks and Implications

The dollar’s expanding circulation relative to shrinking real output creates inflationary potential at the same time as deflationary pressure emerges from collapsing demand. This paradox (monetary inflation vs. real contraction) risks producing stagflationary depression, the most destabilizing possible combination.

Türkiye, Thailand, and China are the most immediate candidates for fiscal stress testing. With deficits rising rapidly, bond markets will begin to price in higher default probabilities unless credible stabilization plans are announced.

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Prepared by:
Altınbaş Capital Global Investment Research
Macroeconomic & Sovereign Risk Team – Türkiye Office

Authors:

• Dr. Selim Kaya, Senior Economist, EMEA Sovereign Strategy
• Leyla Demir, Vice President, Emerging Markets Research
• Jonathan Weiss, Associate, Global Macro Analysis

Reviewed by:

• Prof. Aylin Ersoy, Managing Director, Head of Turkey Research Division

Distribution:
For internal use only. Not for external redistribution without prior authorization.