World Economy

Published by OurEconomy.org on November 14, 2009 filed under News, World Economy   ·   Comments (0)

The Context Of World Economy Today

In recent  months the world has witnessed an upward trend in the capital markets worldwide. This development was driven by several factors: the improvements in macroeconomic indicators from the United States, with spill-over effects in the world (after the severe decline recorded during 2008), in the context of the recovery measures adopted by monetary and fiscal authorities of the world, the results reported by companies (both in the first quarter and second quarter).

In 2008, the most developed economies in the world have entered into contracts, contributing to a decline in exports of emerging countries (which led to stopping the economic growth and in some cases entry into recession of several states). Furthermore, the panic in U.S. financial sector has spread worldwide, contributing to increased risk aversion of investors, which led to severe decline in the financial markets, currency depreciation and financial blockage countries with macroeconomic imbalances.

The world economy is in the process of cyclical adjustment, the transition from the previous cycle (dominated by macroeconomic policies to support aggregate demand in the U.S. and the deepening of globalization) to a new economic cycle.

However, the global economy continues to grow below potential and in the quarters ahead. It should be noted here that the potential for development of the American economy (the first dimension in the global economy) has an unfavorable trend in recent years.

The main cost of this adjustment of the global economy is deteriorating conditions in the labor market: the unemployment rate has doubled in the United States over the past 2 years (from 4.7% in mid-2007 to 9.4% today, schedule joined), the unemployment rate increased by 2 pp in the euro area (from 7.5% in mid-2007 from 9.5% currently), rate of unemployment is now at maximum record 5.7% in Japan.

In this context, economists draw attention to the risk factors for development of capital markets in the near future. These factors could contribute to the correction of stock market indices in the world (at least 10% decline from recent highs). It should be noted that these corrections could be more pronounced (not excluded to enter the phase of bear market – over 20% decline from recent highs), as the margin of maneuver of monetary and fiscal authorities of the world is very small now, after the measures adopted during the past few quarters (investors could become concerned about the credibility of monetary policy of central banks and the sustainability of public finances).

First, one of the factors that supported the scholar’s rally in recent months has been progress over analysts’ estimates of the results reported by companies in quarters I and II. Currently, we are at the end of the reporting period T2/

Moreover, the advance of capital markets in recent years could contribute to investor concern about the high level of evaluation indicators of companies: PER indicators with current maximum levels of previous years, being over the long term average ( PER of 19 on S & P 500).

It must also be noted that the losses reported in the financial system from the onset of financial crisis, estimated at 1.5-2 thousand billion, is well below the expected IMF.

Companies have adopted several measures to increase labor productivity over the past few quarters. However, increasing productivity by reducing the number of employees and wages is not sustainable on long term. For a sustainable recovery of the economies of developed countries are needed productivity shocks.

This scenario of short-term correction in the international capital markets appear to be supported by recent developments in Baltic Dry Index. It fell from a peak of 291 p. 4 year in the first days of June, at a level currently 2 p. 423 (declining by about 44%).

Also mentioned are Bearish signals from China, investors in financial markets react strongly to macroeconomic policy decisions in this country (the most severe recession of the end of the Second World War in the developed economies of the broad hopes to potential investors Chinese economy, which may gradually replace American private consumption as an engine for world economy).

Among the companies that could record the correction in the coming period are included: banking and financial sector companies (the sector has registered an advance of over 120% in the United States from lows in March), the mining and energy sectors. Emerging Markets corrections could record higher amplitude.

Based on the current factors, the predictions for the next years cannot be accurately appreciated, but it can be noticed that the losses will not be that great the next year and the majority of the financial sectors will be revitalized.

Topics: american economy, capital markets, currency depreciation, economic cycle, economists, financial markets, financial sector, global economy, Recession, risk aversion, risk factors, World Economy