Jeremy Warner: Japanese horror show reveals depths of the global slump

Outlook: The data just keeps on getting worse and worse. The 3.3 per cent reduction in GDP reported yesterday by Japan for the final quarter of last year is by far the largest economic contraction for any of the big developed nations announced so far, and dwarfs anything that Japan experienced during its infamous "lost decade" of growth during the 1990s.

Kaoru Yosano, minister for economic and fiscal policy, calls it the biggest economic crisis since the war, which for a country considered to have been in almost perpetual economic crisis for nearly 20 years now, is saying quite something. It's small wonder the Japanese finance minister appeared drunk at last weekend's G7 meeting in Rome. If he had been drowning his sorrows, it wouldn't have been altogether surprising.

The next nearest contraction among the G7 is Germany, which recently reported GDP had fallen 2.1 per cent for the final quarter. Both these economies are heavily dependent on exports for their well-being and are therefore badly hit by the slump in global demand for goods. Once the present inventory adjustment is over, industrial production in both these countries ought to bounce quite sharply, but I wouldn't count on the uplift being sustained. A more permanent recovery in global demand is required before that can happen.

Sometimes there seems to be no justice in the world. The country that gave us the credit crunch, the United States, actually seems to be surviving the downturn better than most, and even us over-indebted Brits, having enjoyed a decade-long boom in credit-fuelled consumption and one of the most pronounced housing market bubbles in the world, are not doing nearly as badly as Germany and Japan. Britain's GDP shrank by "only" 1.5 per cent in the final quarter. It seems to be as bad for an economy to be overly dependent on manufacturing as it is on consumption.

In any case, thrifty behaviour and cutting-edge engineering skills don't seem to have made these economies any better placed to survive the downturn in demand than the let-rip spending mentality which has characterised the English-speaking nations. To the contrary, German and Japanese expertise in making cars, dish-washers and electronic gadgetry seems to have been as much underpinned by the credit bubble as the London housing market.

The 850 job losses announced yesterday at BMW's Mini plant in Cowley, Oxford are as nothing compared to what's about to happen in the industrial heartlands of Germany and Japan. Dependency on manufacturing industries has not brought economic salvation.

It is all very well lecturing us Anglo-Saxon profligates on the dangers of debt, but the truth is we were all in it together. But for the Anglo-Saxon propensity to borrow and spend, there would have been no market for BMWs, Toyotas and Miele vacuum cleaners. The trade and capital imbalances that fed the credit bubble have turned out to be as much a problem for the surplus nations as the deficit ones.

Both the German and Japanese economies are further hampered by the strength of their currencies, which ironically makes the apparently less creditworthy nations of America and Britain likely to recover more quickly. Jean-Claude Trichet, president of the European Central Bank yesterday likened the euro to a "shelter" which offered protection from the storm. I'm not sure all single-currency members see it that way. A number would prefer the reflationary boost Britain is getting from a depreciating currency. And German taxpayers will take it very badly indeed if they are forced to bail out other eurozone members in danger of going into default.

Yet Mr Trichet is surely right in much else he told the European Parliament yesterday. In swamping the system with cheap money, tax cuts and public spending, policymakers must avoid sowing the seeds for future crises. Too much cheap money is how we got into trouble in the first place. Paradoxically, the crisis requires that we treat the sickness with the same poison that caused it, but we must also know when to stop the medicine. Otherwise we risk simply stoking a further, even more serious, crisis for the future.

Each nation must have an exit strategy – a clear road-map for putting the public finances back on the straight and narrow once the immediate crisis is over. Nations must also commit to clear-cut mechanisms for dealing with economic imbalances and for improved financial surveillance. Yet for the time being, the policy response must be focused on fire- fighting. Thrifty or profligate, it makes no difference: all are being punished in equal measure.