Friday, February 13, 2009

Snapshots Of Global Economies

Snapshot of European economy, source BBC

(1) US economy

There is not much time left & yet policymakers have nearly exhausted all ammos. Interest rates have been maintained between 0 - 0.25% & yet it fails to jump start the economy. The proposed quantitative easing also fails to provide visible results simply because banks are still reluctant to lend & people dare not to take up any large financial commitment at the moments. Critics rifled that it will be another classic case of failure, just like what we have in Japan. Tax cut has been saved rather than spent. Our only option? More public spending into the economy, by building more schools, hospitals, repair roads & bridges etc. This is meant to absorb more unemployed

However, I’m afraid that Obama’s political rhetoric to create 4 million jobs will meet failure. Current jobless toll is 3.7million people. By next month, through negative multiplier effect probably we already have more than 4 million jobless people before even a million is created. I hold my view that the US economy will not recover, not until early next year

(2) UK economy

UK’s economy is the worst affected among developed nations with its GDP contract by 3%. UK’s economy is largely hit by the housing market woes due to the high proportion of people who store their wealth in property market. Marked fall in house prices means falling wealth which had severely crippled consumers confidence. There are just too many problems. Like America, most policies do not seem to work at the moment. Interest rates have been adjusted downward from 5.75% in September 2007 to 1% January 2009. National debt as a % of GDP has increased to 47% due to the massive bailout of Northern Rock, RBS, Bradford & Bingley and HBOS & this has overshot Gordon’s own sustainable investment rule. However it is argued that this is an insignificant figure if we compared to US which exceeds 70%, France & Germany around 64% and Japan 194% of its GDP

However, there is a fear over UK services export sector. Tertiary sector has very high income elasticity of demand. This means a slight fall in income will create a larger than proportionate fall in demand for UK services. This will definitely hurt employment in this sector which makes up of majority workforce in UK economy

(3) Eurozone

(a) Germany’s economy shrunk 0.4% in 2nd quarter & 0.5% in 3rd quarter. By definition, Germany has entered into a recession. To strengthen this, its economy contract even further by 2.1% in 4th quarter. It comes under surprise. Unlike UK economy, there is no housing market boom & bust, no over-borrowing, high level of savings just like Japan & China & yet recession took place. This is because Germany’s economy is export-driven & it forms a large component of GDP. So a fall in exports will drive AD down. For UK, it is consumption-driven & it makes up nearly 70% of her GDP. So in UK’s experience, is contract in personal expenditure. Demand for Germany’s manufactured good will continue to fall in near term due to the appreciation of euro. Also its practice of responsible-borrowing in recession, will actually hurt more of its economy due to fall in G

(b) France as the top 3 largest economy in Euro is not spared too. One problem that persist in its economy until now is high rate of unemployment which is about 8%, above the EU average. In recession this figure will definitely higher. I won’t be surprised with this. In EU, France is very well known for its strong labour union which often fight for unreasonable high salary. Also there are lots of regulations which are not in favour of companies e.g. high corporation tax of 33.3%, maximum 35-hours working week, increased difficulty of firing etc. All these increase the operation costs. Furthermore, with limitations like limit of spending not exceeding 3% of GDP & lost of control over monetary policy, France economy is set to decrease further

(c) Meanwhile Iceland economy had collapsed, that economists cynically cited that even Zimbabwean’s economy will perform better than Iceland. Its economy is said to suffer from Great Depression-style of fall in output by 10% next year. Nevertheless, it is sort of embarrassing to see one of the richest nations in the world to turn to IMF for financial assistance
(4) China

The latest report stated that China’s export had plunged 17.5% & this is the worst figure since 1997-1998. At the moment of writing, import is falling at a quicker rate than export, suggesting how the growing number of middle-classes in China is affected. Also it is a sign of lesser investment & falling import for intermediate goods. Since Chinese economy is export-driven due to its comparative advantage of cheap labour, we will witness large scale of retrenchment in manufacturing sectors which are labour-intensive. Economy of Guangdong & Shenzhen will be the worst affected since they become the house to many factories. The revaluation of renminbi will actually worsen the situation. Despite this, Chinese economy will continue to grow, but at a slower pace at around 6-7% in 2009

(5) Japan
Japan had undergone the ‘long lost decade’ in 1990s to early 2000s due to housing market bust. Many efforts were done, including maintaining interest rates at 0% for many years but it failed to revive the economy. Related to the concept propounded by Keynes- paradox of thrift. Also quantitative easing being used does not provide any significant results. Government debt on the other hand had been piling up to 194% of GDP. Only somewhere around 2005, its economy began to show some recovery, thanks to the export sector. Price level began to increase for the first time, prompting officials to raise interest rate to 0.5%. Alas, the success is not long before the Japanese economy was slapped by another bitterness. Demand for Japan’s good particularly electronic fell sharply due to major US & major EU economy are in recession

(6) Sub-Saharan African
The poorest countries in the world, majority which originates from SSA will be the worst affected. IMF & World Bank already in the progress of cutting financial aid to these countries in the period when they needed it most. Development economists regret that those efforts all this while to pull the poor Africans out from the cycle poverty is washed away with the global credit crisis, putting more people back into absolute poverty. In fact these poor people should bot bear the brunt of crisis that originated from America