The Stumbling World Economy

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world economic slowdown
A trader watches the dow jones during the crash of 2008 which precipitated the global economic crisis. Photo –

Ever since the recession hit in 2008, the stimulus programmes that had been initiated faced great criticism over the fact that these would only be a short solution. Constant injections of liquidity and support systems would be required to lengthen their impact to lead to any form of long term growth.

Based on the stimulus packages that were put into place, recovery was being seen in recent months where US unemployment figures were encouraging aided by the manufacturing figures from China and trade figures from Japan. Late 2011 and early 2012 had shown hints of a recovery that was expected and much needed in the world economy and things had started to look up. The world was slowly coming out of the effects of the recession and the much feared double dip recession and more fatalistic depression were looking like a thing of the past.

The recent publication of economic data around the world has shown that the ground that was being gained for sometime is now being lost and the impact of the economic stimuli that were used have run their course. The downward pressure that the eurozone crisis has had on the economy is now showing effects in Asia, Europe and US collectively and there is a need for further assistance for the central banks to take appropriate measures. The hard work that led to the awakening of the sleeping economies might be lost if efforts are not made.

In lieu of this, the Australian jobs data released Wednesday signalled towards a slowdown which has triggered an asset purchase in Japan to slowdown deflation. Similar expansionary programmes are being carried out in South Korea and now the support being provided by the European Stability Mechanism to Spain, Italy and Greece shows that everyone expects things to get worse before they get better. They are willing to overcompensate and do more right now and be corrected by the markets and data of the future rather than do anything less than what is required. The trend seen by the US economy also mirrors the situation around the world and the minutes released by the Federal Open Market Committee (FOMC) on Wednesday hint towards a much expected and anticipated expansionary measure to be announced at the end of July.

China isn’t immune to this phenomenon either. The trend in China has shown that in the beginning, its manufacturing and production data lagged the rest of the world. The initial impact was only on the trade data, however, now it is catching up as well. China experienced its weakest growth rate in three years, and in response to that, the Chinese authorities want to carry out measures to curb the situation.

With trade being affected by the eurozone debt crisis and manufacturing being impacted simultaneously, now the test for China is to stimulate the economy while trying to prevent an asset bubble that can occur in the economy. The method that has been used previously consisted of making real estate investment expensive and having higher rates on mortgages to discourage an asset bubble that was seen in the US from 2006-2008.

Now, however, China needs to show growth in its GDP and analysts say that this will only be possible if real estate is recognised and treated equally. This will boost the growth figures to the rates that the economy is expecting for itself in the next financial year. May saw the induction of certain programmes to encourage the real estate sector of the economy including giving home subsidies, mortgage discounts and fine tuning policies throughout the country to favour the industry as a whole. Compliment industries like electrical, machinery and chemicals also got a boost from these measures.

The fear when such policies are put into place is to try to balance the short term goals with the long term ones and to see whether the short term gains offset the long term gains that could have had been achieved. At this point, the central banks seem to be chasing the problem and are always catching up in regards of what to do next. In these circumstances, the here and now approach has taken precedence over the long term view. These measures will need time before their performance can be evaluated and all eyes would be set on data from next coming months to see how effective they have been.

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