Iran and Hamas

World economy

Accelerating downhill

Why China and Germany need to do more to boost demand

EVERYONE knows that the financial system took a downward dive in mid-September. The failure of Lehman Brothers turned the rich world’s credit crunch into a global calamity, as the international banking system came close to collapse and even the most basic functions of finance, such as trade credit, seized up. To stop this financial breakdown sending the world economy into a tailspin, politicians scrambled with bank-rescue packages and promises of fiscal stimulus. Unfortunately, it seems increasingly clear that they failed. Just as the financial crisis went global at the end of 2008, so large chunks of the world economy went into free-fall.

Industry is in grave trouble. Around the world factory output is plunging at its fastest pace in decades as the consequences of slumping demand have rattled along the supply chain. In the three months to November American industrial production fell at an annualised rate of 16% compared with the three months before. Over the same period Japan’s fell by 21% and Germany’s by 15%. Some emerging economies have done even worse. South Korea’s factory output fell at an annualised rate of 25% in the three months to November, about as fast as in its financial crisis a decade ago.

Deep and dark

On the basis of these figures and the gloomy state of manufacturers’ order books, economists at JPMorgan reckon that global manufacturing production is likely to have fallen at an annualised rate of almost 20% in the last three months of 2008. The car industry is seeing the most savage drop in sales in its history (see article), but the collapse in demand is widespread. From computer chips to sophisticated machine tools, the production of goods is plunging. As a result trade flows, which had grown faster than output for decades, have recently shifted into reverse. Germany’s exports are falling at their fastest pace in many years. Taiwan’s exports fell by 42% in the year to December. After years of double-digit growth, China’s exports are now falling too, though by less than those in the rest of East Asia (see article).

Manufacturing is highly cyclical, falling first and fast in a downturn. Firms are quick to scale back capital spending and consumers skip new cars rather than scrimp on food or healthcare. A rapid rundown in inventories and temporary distortions in credit markets (see article) have not helped. The collapse of trade finance made it all but impossible for many producers to shift their goods abroad. The plunge in trade flows is partly a result of tumbling commodity prices.

Stumble or slump?

Trade finance is beginning to flow. Firms cannot run down stocks for ever: eventually, they will empty their warehouses. But the damage is done: those temporary factors triggered a collapse in global demand that has now spread way beyond the Anglo-Saxon economies at the heart of the credit crisis.

Output in the euro area probably fell as fast as in Britain and America in the last three months of 2008, even as Japan’s GDP sagged still more dramatically (see article). The drop in industrial output has hammered export-dependent economies, from Germany to Taiwan, and there is little sign that domestic demand in these countries is stepping in to compensate. In some countries with big external surpluses, notably China, the opposite may be true. China’s imports have been falling faster than its exports and in recent months its trade surplus has risen.

Add these factors together and the outlook seems grim. This sharp global drop in industrial production will itself lead to more weakness, as unemployment rises around the world and demand therefore falls. And in America, too, the outlook has grown darker. Around three-quarters of output growth over the past two years came from net exports. That prop will go. And while domestic demand in surplus economies flags, the imbalances that have contributed to the current crisis will not right themselves, and will encourage protectionism. When rich-country economies were growing, China’s surplus was a political lightning-rod; how much more dangerous will it be when unemployment is rising?

To mitigate these risks policymakers need to do more to prop up demand, especially in countries that have external surpluses. Fiscal stimulus packages that seemed sufficient two months ago may be too small, and too slow to take effect. Much of the infrastructure spending in the package that China announced in November will not kick in until later this year. This week’s decision by Germany’s government to add a second €50 billion ($66 billion) stimulus package is a step forward, though at barely more than 1% of GDP it is still far too small (see article). For the time being, the biggest and quickest fiscal boost is likely to come from America, as the Obama team seeks speedy passage of an $800 billion package of tax cuts and spending. That sort of money may put a brake on the global industrial collapse, but it will not set the world economy on course for a sustainable recovery. Others still need to do far more.

Iran and Hamas

Iran and Hamas

How Iran fits in

Iran backs Hamas, but the relationship may not be as close as some suggest

WHAT role does Iran play in the ongoing conflict between Israel and Hamas? According to many in Israel, the relationship between Tehran and the Palestinian group is a tight one. This week Binyamin Netanyahu, a former Israeli prime minister and leader of the hardline opposition Likud party, said that Iran was Hamas’s “patron”, and argued that both seek Israel’s destruction. In practice, he went on, Hamas had created an “Iranian base” right next to Israel. Shimon Peres, Israel’s president, took a similar stance in an interview this month, giving warning that Gaza must not become a satellite of Iran.

Israel says that Iran has armed Hamas. Tzipi Livni, the Israeli foreign minister, argues that Iran has been heavily involved in Hamas’s evolution. At its outset, she says, Hamas used homemade missiles to attack Israel, but that they now fire “professional [ones] coming from Iran.” Israeli leaders point out, too, that Iran provides rhetorical support for Hamas, bitterly criticising Egypt and Saudi Arabia for failing to break Israel’s economic blockade of Gaza.

The government of Iran, too, has been keen to associate itself with the Palestinians. Mahmoud Ahmadinejad, Iran’s president, was quick to condemn Israel for its attack on Gaza and put pressure on Arab rivals for failing to support Hamas. In a letter published on his website on Thursday January 15th, Mr Ahmadinejad urged King Abdullah of Saudi Arabia to speak out against Israel’s offensive in Gaza. He accused the Saudi king and other Arab leaders of being complicit in a “genocide” perpetrated against the Palestinians, and exhorted all Arab states to cut their ties with Israel.

But Hamas’s links with Iran may be hazier than they first seem. For a start Hamas’s exiled leaders are based in Damascus, Syria’s capital, not in Tehran. Second, much of the speculation about Hamas’s relationship with Iran has been prompted by comparisons between Israel’s current conflict in the Gaza Strip and its last war, in Lebanon in 2006, when it faced Hizbullah, another militant Islamist movement. Hizbullah, a Shia group, undoubtedly has close links with Iran, whose population is largely Shia and whose unique system of government is based on Shia Islam. Iran, alongside Syria, played a central role in the establishment of Hizbullah in the 1980s and close strategic ties persist today.

Hamas is a different creature. It emerged out of the Muslim Brotherhood, a Sunni Islamist group, and has less of a natural affinity with Iran. Whereas Iran may see in Hamas some shared revolutionary goals, and of course a shared opposition to Israel, the partnership may be one of expediency as much as a strategic alliance.

Determining Iran’s material support for Hamas is tricky. Iran has provided funding to Hamas, but more cash has probably come from Sunni Arab countries such as Saudi Arabia and Qatar. And although Iran may have supplied Hamas with a number of Katyusha Grad missiles, the majority of Hamas’s arsenal still seems to be homemade Qassam rockets. Iran seems to have been far more generous to Hizbullah in 2006.

Iranian support for Hamas thus appears to be more theatrical than practical. Following a fatwa from Ayatollah Ali Khamenei, Iran’s supreme leader, saying that anyone who was killed while defending Palestinians would be considered a martyr, student groups claimed that 70,000 volunteers signed up to go to Gaza. Some staged a sit-in at Tehran’s international airport, demanding to be allowed to travel to Gaza to help the Palestinians.

But officials reined in demonstrations once they started to involve attacks on embassies. Then the Ayatollah himself went on Iranian television to thank those who had offered to go to Gaza, but said that Iranians' hands were tied in this arena. This was understood as a ban on Iranians actually getting on planes and flying off to assist Palestinians.

For Mr Ahmadinejad there is a balance to strike regarding Hamas. Stirring up public anger over Gaza provides a welcome distraction from Iran’s ongoing economic woes ahead of a presidential election in June. Yet he might prefer to limit Iran’s outbursts, for now at least, to avoid provoking a direct confrontation with Israel, and in turn with America, just as Barack Obama enters the White House. The arrival of a new American president who may prove to be more conciliatory than his predecessor represents a delicate moment for Iranian diplomacy, for example over its disputed nuclear programme. Iran may indeed be interested in Hamas’s fortunes, but it is concerned with other matters too.