Browse > Home / Economy / What’s Next? An Analysis on the Global Economy

What’s Next? An Analysis on the Global Economy

Posted on: August 22, 2008 - Email Article - Printable Version

Santosh Sankar

About the Author:

Globalization, it brings its rewards amongst which are inexpensive labor, more jobs to developing nations that helps fuel growth, and an opportunity to increase one’s wealth. However, globalization also has it’s low points. As we worked towards reaping the benefits of globalization, what used to be domestic economies became integrated to form the global economy. This integration made trade easier, businesses expanded to all corners of the world, and brought the rise of India and China who have established themselves as world powers. The integration also left the individual economies exposed to one another, left us more prone to contagion. It has been over a year since the credit crisis began and the U.S. economy is suffering through rising defaults on loans, inflation at a 17 year high, a high unemployment rate, and lets not forget the fall of Bear Stearns. The pain we have felt here is slowly permeating borders and spreading internationally. It is important to be aware of the international trends since now we are no longer a domestic economy but apart of a greater global economy.

It Started in America

Low interest rates, lax credit standards, and a housing bubble were all catalysts that led to the credit crunch. The effects of these catalysts were not realized till an August afternoon in 2007 when Wall Street bankers were out of the office on vacation. The credit crisis was primarily caused by the spike in residential foreclosures that sent waves through the financial markets. Lenders began to stop issuing credit scared that consumers and businesses alike will be unable to payback their debt. The credit markets were no longer liquid, and Wall Street was about to shock the public.

Banks began revealing their huge collection of securitized mortgages called Collateralized Debt Obligations or CDOs. Now when consumers could not pay their mortgages every month, that became a problem, the CDOs had to rely on the underlying asset, houses to maintain their value. However, the burst of the housing bubble caused property prices to fall dramatically. All major banks began writing down these debt instruments, international banks were not safe either, the likes of UBS, Deutsche Bank, and Barclays were among many that held CDOs. The U.S. economy has had it’s ups and downs, flirting with recession as inflation runs rampant and the unemployment rate increases. Understanding our current situation, an important question to ask is, how is the rest of the world doing?

No One is Safe

Aside from the credit crunch, energy prices skyrocketed world wide as supply concerns were priced into the commodities market. Gasoline prices rose as crude oil reached prices as high as $148/barrel causing populations in Europe and America to resort to mass transit options such as regional rail and buses to deter high costs. As inflation became a concern, ECB took a hawkish stance and began a battle against inflation. If you read an earlier article on the British Economy, the picture is quite gloomy there too. So who is safe? The answer: No one.

The Eurozone and U.K.

The Eurozone and U.K. are at the tipping point of recession, the ECB has cited that GDP growth slowed by 0.2%, the U.K.’s GDP grew by a weak 0.2% showing signs of a housing crisis.

Eurozone Inflation from Trading Economics

The possibility of a recession in the U.K. looks very likely as consumers hold back, evident in a 0.9% fall in retail sales. Homes across the board have lost almost 9% of their value. Contagion is evident here as America’s housing crisis is slowly permeating borders and causing similar situations in Britain. The Eurozone is benefiting from a weak dollar but has started to hurt as the dollar rallied in the last month. Germany, Spain, and Italy are some of the nations who are reporting less favorable economic conditions.

Asia

Economic integration has made it that everyone will feel the U.S. slowdown. China and India are not safe either, who consumes their products and services? We do, when we stop spending where will the majority of their businesses gain revenues from? Their domestic economies cannot maintain the high levels of growth that they have experienced. The American Housing Crisis has left consumers here in the U.S. to reduce spending, the weak dollar has reduced foreign travel, and not to mention gas prices and rising food costs are hurting populations worldwide. CNN reports have cited slow growth in Chinese automobile sales and the WSJ.com says that Hong Kong’s economy is slowing down at a drastic pace. The Tiger and Dragon may not hit a recession like it’s counterparts, but they will see a sizable slowdown in growth.

America seems to have have started a huge correction, driving inflated home prices down and restoring caution when issuing credit to borrowers. Economic growth is sluggish as countries are trying to revive liquidity in their credit markets. The important thing is we part from the rear view mirror and look forward to anticipate further changes (both good and bad) in our economic environment.

What’s Next?

Although it is impossible to predict what is on the horizon, I can certainly attempt to make a prediction. The U.S. housing market must stabilize in order for the economy to regain its health. However, in order for this to happen, the unemployment rate needs to fall. We cannot expect people to afford mortgages without jobs as credit standards are elevated. Until people are back at work again, a big portion of the economy will remain in a slump. The same goes for Europe and U.K. where housing is in bad shape and credit markets require time to heal. The restoration of the housing market will help everyone as Asia will enjoy large inflows of dollars and financial institutions here in America and Europe will enjoy posting quarterly profits over multi-billion dollar write downs.

I believe that the economy will look upwards around Q2 2009 as the write downs stop and the market absorbs high energy prices. Yes, I do believe that oil will see significant appreciation as China maintains its hunger for energy and alternative energy remains unfeasible for our current needs. Granted inflation will remain high due to this, but a gradual increase is inevitable until we actively research other areas. The Eurozone and Britain seem to be behind America in the economic cycle and may not see significant change till Q3, but an improvement in America will only help populations worldwide. We have to last under a year through our current conditions and we will come out okay, but have to tackle our energy problems aggressively. An efficient economy has its peaks and troughs, although there have been causalities it is the nature of economics.

- Santosh Sankar

Disclaimer: None

Share or Bookmark This Post: