Global Economy Reviews

02.08.2011 19:21 World Economy Review - July 2011

The tentative deal to avoid a crushing debt default is at best a mild relief for the U.S. economy that nearly stalled in the first half of the year and has yet to show signs of any realistic pickup. The plan for $2.4 trillion in spending cuts over a decade, if backed by lawmakers, would help lift some of the uncertainty that has weighed on investors, businesses and consumers unsettled by talk about a possible new and deep U.S. financial meltdown.
Still, it does not decisively remove the threat that the nation`s AAA credit rating could be downgraded, an action that would raise borrowing costs across the board, and the prospect of further cuts ahead will cut short any celebrating. "This will have minimal impact on the economy. The cuts are not there for the first couple of years, which really makes you wonder if they`re really going to happen at all," said Peter Morici, an economics professor at the University of Maryland. The prospect of spending cuts is the last thing the U.S. economy needs right now, many commentators say.
Economists were stunned on Friday when data showed the U.S. economy grew just 0.4 percent in the first three months of this year -- perilously close to contraction -- and picked up unimpressively to 1.3 percent in the second quarter.
Against the backdrop of the weak economic recovery, the divided political parties in Congress appear to have agreed on one thing early on in their dispute over how to raise the U.S. debt ceiling: that spending cuts to narrow the deficit should be phased in slowly. They will be phased in from 2013.
President Barack Obama said that the initial discretionary cuts, expected to be about $917 billion, "wouldn`t happen so abruptly that they`d be a drag on a fragile economy." He added that "job-creating" investments in education and research would be preserved.
But the bulk of the austerity has yet to be defined. About $1.5 trillion of the planned savings will be decided by a bipartisan congressional commission, leaving unanswered the question as to whether the United States has the political will to tame the country`s growing debt pile once and for all.
Troy Davig, U.S. economist at Barclays Capital, estimated that the deal would only cut $25-30 billion from government spending in the first year, which could shave about a tenth of a percentage point off economic growth. "It`s not a major drag on growth but when the economy is only growing a point and a half, a lot of economists feel that this is not the right time to be finding fiscal restraint. We will be shifting from massive stimulus to massive restraint."
Steeper and faster spending cuts could have dealt a knockout blow to an economy reeling from high fuel prices, bad weather, Japan`s earthquake and a depressed housing market, plus a labor market that shows few signs of recovery.

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09.07.2011 17:46 World Economy Review - June 2011

Global rating agency Fitch has revised the GDP forecast and lowered it for a number of countries and regions, stressing that it was a more moderate pace of growth rather than a sharp slowdown in a report, entitled Global Economic Outlook (GEO).
Global economic recovery continues, experts from Fitch Ratings reported. According to them, the current weakening of global economic growth is related to temporary factors, including the negative impact of high oil prices and the consequences of an earthquake in Japan that took place in March. Emerging economies remain to be the engine of global growth. However, outlook downgrade was common for them, as well as a result of tighter monetary policy within the context of high inflation. Despite the fact that the debt crisis in the Eurozone remains the most discussed topic, the region`s economic growth rates in the first quarter of 2011 surpassed Fitch`s expectations. Germany`s economic rebound was one of the key factors in this respect.
Fitch has revised only a notch downwards its global growth forecast to 3.1 percent in 2011, from 3.2 percent in its previous global economic outlook report. The latest report also projects that global economic output will rise to 3.4 percent in 2012 and 2013 (up from 3 percent projected earlier) as it expects the major advanced economies to grow by 2.3 percent for 2012 and 2013.
Fitch has said that current soft patch in global economic growth is temporary and the recovery is on track, though at an uneven pace, even as it has revised growth forecast for the BRIC economies downward to 6.9 from 7.1 percent for 2011.
Stating that the current weak trends are primarily a fallout of higher oil prices and the Japanese disaster of March 11, Fitch Ratings , in its latest global economic outlook, says the emerging- market dynamism is still the main driver of the global recovery, though the overall growth numbers will see a minor dip.
"The emerging market dynamism is still the main driver of the global recovery. However, evidence of deceleration from 2010 is emerging as monetary policy tightening takes hold in the context of rising inflation," says the report.
Fitch`s sovereign team director Maria Malas-Mroueh says, "The fragility of the global recovery is highlighted by the weak Q1 numbers in several major economies, slowing global production indicators, and concerns about the impact of monetary policy tightening in key emerging markets. "This growth moderation, combined with increased inflationary pressures, raises a policy dilemma for the central banks, particularly in the major advanced economies," she adds.

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05.06.2011 14:01 World Economy Review - May 2011

The euro zone economy will grow 1.6 percent this year with inflation well above the European Central Bank`s target, but the aggregated budget deficit will fall more than previously thought, the European Commission said. In its twice-yearly economic forecast the European Union executive kept its forecast of 1.6 percent growth in 2011, first made in February, and raised its inflation forecast for this year to 2.6 percent from the 2.2 percent projected in February. "The main message in our forecast is that the economic recovery in Europe is solid and continues, despite recent external turbulence and tensions in the sovereign debt market," Economic and Monetary Affairs Commissioner Olli Rehn said.
The Commission said the overall budget deficit of the 17 countries using the euro would shrink to 4.3 percent of gross domestic product this year from 6.0 percent in 2010, rather than to 4.6 percent from 6.3 percent as forecast last November. Next year, the overall euro zone government deficit will fall further to 3.5 percent of GDP rather than 3.9 percent as forecast in November.
"Public deficits are clearly declining. It is now essential to strengthen these trends of growth and consolidation and also ensure that they translate into more and better jobs," Rehn said. "This calls for continued fiscal consolidation and determined implementation of structural reforms that help job creation and improve the competitiveness of our economies," he said.
But the Commission also forecast that unless policies changed, Greece, which is struggling to put its public finances in order under a joint EU and IMF bailout programme, would miss its deficit and debt targets this year and next. The Commission forecast that without policy shifts, Greece would have a budget deficit of 9.5 percent of GDP this year and 9.3 percent in 2012, rather than the 7.6 percent and 6.5 percent respectively envisaged in the EU/IMF programme.
Greek debt would rise to 157.7 percent of gross domestic product this year and to 166.1 percent in 2012, rather than be 145.2 and 148.8 percent as under the EU/IMF plan targets. Ireland, also under an EU/IMF programme would be broadly on track with its fiscal deficit adjustment, the Commission said.

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06.05.2011 20:45 World Economy Review - April 2011

The International Monetary Fund (IMF) recently made a bold prediction that China will exceed the United States and become the world`s largest economy as early as 2016 in terms of purchasing power parity. This prediction seems to add new evidence to the popular statements made by some western analysts who believe China`s rise is the main cause for the decline of the United States.
"Is the United States really on its wane?" "Will China`s rise mainly lead to the decline of the United States?" Experts on international issues in Beijing pointed out that the proposition and judgment regarding the decline of the United States is controversial. Even if the United States is coming down, China`s rise is not the main reason.
The IMF`s prediction shows that according to the current growth rate, China`s economic size will reach 19 trillion U.S. dollars in 2016 in terms of purchasing power parity while the U.S. economic size will reach 18.8 trillion U.S. dollars in 2016. Therefore, China will exceed the United States and become the world`s largest economy.
"We will reach different conclusions from different angles regarding the proposition of the decline of the United States. I think, more specifically, U.S. power is now in the state of absolute growth and relative decline," said Ni Feng, deputy director of the Institute of American Studies under the Chinese Academy of Social Sciences.
Ni said that the United States showed a significant economic growth over the past decade, moving ahead of other developed economies such as the European Union and Japan, while the faster development of emerging economies indeed has brought the phenomenon of the relative decline of the United States.
However, Ni also stressed that the relative decline of the United States is mainly embodied in the economic field. The downward trend in fields such as politics, military affairs and science and technology is not obvious, and its performance in some fields has even become more outstanding.
Data shows that despite the severe economic downturns caused by the collapse of the Internet bubble in 2001 and by the international financial crisis from 2008 through 2009, the GDP of the United States, calculated at constant prices, was up 21 percent during a period from 2000 to 2010. Some economic indicators of the United States have dropped compared with other countries in the world. The proportion of U.S. GDP to the total GDP of the 19 other G20 countries stood at 61 percent in 2000 and dropped to 42 percent in 2010. The U.S. GDP was more than eight times that of China in 2000 and was less than three times that of China in 2010. "The U.S. GDP share of the world`s total was once more than 50 percent after the second world war and stands at around 25 percent today. The strength of the United States by GDP has indeed comparatively declined, causing the United States to give up "the dominance of global economic affairs" and seek "multilateral cooperation" to deal with international economic issues."
The G20 including members such as the United States, Japan, China and India has become a major platform for managing the world economy. During the reforms of the World Bank in April 2010, developed countries shifted more than 3 percentage points of voting rights to developing countries. In October 2010, the IMF passed a reform plan transferring 6 percentage points of voting rights to underrepresented countries including emerging countries. With the continuous development of China-U.S. ties and in-depth changes in the international situation, the mechanisms such as the China-U.S. strategic and economic dialogue have emerged.
Yang Bin, an economist at the Chinese Academy of Social Sciences, said that the international financial crisis and the fall in the economic influence of the United States can be considered a reflection of the "decline" for the United States. However, the key reason behind the "decline" is not the "rise of other countries" but fundamental defects in its economic system and structure.
Yang said that the United States currently features a growing scale of financial monopoly capital, the deepening of economic "financialization," "virtualization" and "hollowing out," as well as the increasing share of speculation in economic activities, the excessive concentration of wealth to financial oligarchs and continued high unemployment rates. "The international financial crisis is just a warning. If the United States does not change its neo-liberal economic system and development mode, the deterioration in its economic strength will continue," Yang said.
The U.S. economy has been faced with increasingly deteriorating problems of high fiscal deficits, high trade deficits, and high debts for a long time. The United States has been the world`s largest debtor nation since the 1980s, but has managed to maintain economic growth by overusing the dollar hegemony, running up huge debts, and printing bills beyond reasonable bounds, which led to a lopsided financial development and a declining manufacturing industry. Manufacturing, the principal part of a real economy, only accounts for about 10 percent of U.S. GDP and corporate profits. By contrast, service industries, mainly consisting of the financial services industry, account for around 80 percent of the country`s GDP. The financial and real estate services industries generate over 40 percent of U.S. corporate profits.
The "financialization" of the U.S. economy is in fact "virtualization" and "parasitism." The value of the dollar against other major currencies has dropped significantly. When the dollar falls below a psychologically important level and loses its privileged status, foreign capital will withdraw from the United States quickly, leaving the U.S. economy at risk of collapse.
"The United States` economic power and influence keep falling due to its own perennial problems and the rapid development of emerging economies. While GDP is a good measure of the size of the economy, it cannot reflect the comprehensive national strength of a country. The United States is not really in decline if we fully consider its innovative strength, amount of core technologies, military strength, and other aspects," said Zhu Feng, a professor at the School of International Studies under Peking University.
U.S. military spending has been almost as much as the combined spending of all other countries in the world for many years. According to the statistics recently published by the Stockholm International Peace Research Institute, U.S. military spending rose nearly 3 percent to 698 billion U.S. dollars in 2010, more than that of any other country in the world. Worldwide military spending increased by 20.6 billion U.S. dollars last year, and the United States alone accounted for 19.6 billion U.S. dollars of the increase.
Thanks to its enormous economic size and large lead in business and technology, the United States topped world competitiveness rankings over the past many years. According to statistics from the World Intellectual Property Organization, the United States remained the world`s largest international patent applicant with 44,855 patent applications filed in 2010.
The "China`s National Competitiveness Report" blue book released by the Chinese Academy of Social Sciences in 2010 pointed out that the United States still has a relatively large overall competitive advantage, and its advantages in aspects such as global connections and the human resource structure are even more outstanding.
The blue book said that in the context of globalization, China`s development took the road of "inclusive growth" and needs a fair, cooperative and open environment. It is inadvisable to equate the prosperousness of China`s economy and the enhancement of China`s competitiveness with the so-called "China threat theory."
Zhu said that it will not bring substantive changes in the international security system even if China`s GDP ranks first worldwide. Measuring the international security system needs to consider more on various aspects such as alliance, overseas troops, delivery capacity of military power, and the breadth and density of global security partners. China currently has no capacity and desire to change the existing international security system.
"China will unswervingly follow the path of peaceful development and continue to develop through striving for a peaceful international environment, and will also safeguard and promote world peace with its own development," said President Hu Jintao during his visit to the United States at the beginning of 2011.

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02.04.2011 13:39 World Economy Review - March 2011

Fitch Ratings cut its global economic growth forecasts for this year and next due to the impact of rising oil prices and the earthquake and tsunami in Japan. The ratings company lowered its projections for growth in the U.S., Japan and the euro area for 2011 and said global expansion will slow to 3.2 percent from 3.8 percent in 2010, according to a report published in London today.
Crude oil prices have surged about 32 percent in the past six months, squeezing companies` profits and undermining demand. At the same time, the resulting surge in inflation from higher energy costs is likely to prompt an “earlier policy response” from central banks than previously forecast, Fitch said. “Inflationary pressures have increased in both advanced economies and emerging markets, exacerbating the policy dilemma faced by many monetary policy authorities,” said Maria Malas - Mroueh, a director in Fitch`s sovereign team.
Fitch sees the U.S. economy, the world`s largest, growing 3 percent in 2011 and 2.8 percent in 2012, lower than the previously forecast rates of 3.2 percent and 3.3 percent. For Japan, Fitch cut its 2011 projection to 1 percent from 1.5 percent and raised its 2012 outlook to 2.2 percent from 1.7 percent, reflecting an increase in reconstruction spending after the March 11 earthquake.
The euro-area economy will expand 1.2 percent this year and 1.8 percent in 2012, according to Fitch, lower than the 1.6 percent and 2.1 percent rates it projected previously. Fitch also cut its forecasts for Brazil, China and India, while the increase in oil prices led to a `small upward revision” to Russia`s forecast.
American investment bank Merrill Lynch sees global oil prices surging to $144 per barrel based on the Brent crude benchmark in the next three months given the political unrest in the Middle East and North Africa. “Global oil demand has been expanding at a breakneck pace in recent quarters, and now the political situation in Libya has reduced oil production by one million barrels per day,” Merrill Lynch said in a commentary dated March 7.
To reflect the tighter oil market, Merrill Lynch adjusted upward its average Brent crude forecast to $122 per barrel from its previous estimate of $86. The bank said prices could briefly break through $140 and hit $144 per barrel in the next three months.
For the average Brent crude price for 2011, Merrill Lynch said it would rise to $108 per barrel, up from its previous forecast of $88 per barrel. The bank expects WTI (West Texas Intermediate), also known as Texas light sweet oil, to average $101 per barrel this year, up from its earlier forecast of $87. The price of Brent crude is the benchmark for European economies while that of the WTI is used by the United States.

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