This post offers no solution; the only intent is to give you a glimpse of what is happening to the world economy, and to tell you why the biggest economies in the world are struggling.
The Economist:
“TO THE lifeboats!” That is the stark message bond markets are sending about the global economy. Investors are rushing to buy sovereign bonds in America, Germany and a dwindling number of other “safe” economies. When people are prepared to pay the German government for the privilege of holding its two-year paper, and are willing to lend America’s government funds for a decade for a nominal yield of less than 1.5%, they either expect years of stagnation and deflation or are terrified of imminent disaster. Whichever it is, something is very wrong with the world economy.” (http://www.economist.com/node/21556577)
I will make a long story short… the BRIC´s are in trouble, Europe is in trouble and the USA is in trouble. Investors are so frightened that they are considering government bonds of “safe” economies their best option. Thinking that government bonds are a better investment than investing their money in stocks, real state and etc.. shows how scared and pessimist investors are.
I will quickly address what is wrong with the USA, Europe, India, Brazil and China.
The United States has a huge budget deficit. As of now, the only possible solution to address this problem is to cut spending and increase taxes, something that the population will fight to prevent from happening. On top of that, the country is facing a high and persistent unemployment rate, 8.9% in 2011 and 8.2% in 2012.
In the case of the European Union I will leave for The Economist to better describe:
“The European Union, the world’s biggest economic area, could plunge into a spiral of bank busts, defaults and depression—a financial calamity to dwarf the mayhem unleashed by the bankruptcy of Lehman Brothers in 2008. The possibility of a Greek exit from the euro after its election on June 17th, the deterioration of Spain’s banking sector and the rapid disintegration of Europe’s cross-border capital flows have all increased this danger.”
“…If they come up with a credible solution, it does not guarantee a smooth ride for the world economy; but not coming up with a solution guarantees an economic tragedy.”
(http://www.economist.com/node/21556577)
The BRIC´s are not doing as good as they were doing before either.
INDIA
India´s growth rate has fallen to 5.3%, what used to be a double digit pace of growth (2004-2008). 5.3% growth may seem ok, but this drop means that millions of people that would have been lifted from poverty will remain poor. The Economist justifies this economic slowdown and goes further stating that India will not have the same growth as before at least for a while: “But now, after a slump in the currency, a drying up of private investment and those GDP figures, the miracle feels like a mirage. Whether India can return to a path of high growth depends on its politicians—and, in the end, its voters. The omens, frankly, are not good.”
BRAZIL
The scenario in Brazil doesn´t look any brighter, take a look at the country GDP in the last 2 years and the projection for 2012 and 2013
2010 – 7.5%
2011 – 2.7%
Projections
2012 – 2.53%
2013 – 4.30%
For the most part the growth of the Brazilian economy happened due to the increase of the price of commodities that reached its peak in 2008. Problem comes because recently the South American giant is facing a combination of the devaluation of the exchange rate, elevated taxes and duties, inflationary pressure and burocracy. Brazil, the country with the most expensive cars in the world also became expensive to live and eat. House prices rose 19% compared to last year. The most pessimist analysts expressed a “bubble fear”.
IMD, which evaluates the business competitiveness among countries, ranked Brazil number 46 out of 59. And the reason for this low ranking is the combination of the issues listed above. (http://www.imd.org/research/publications/wcy/upload/scoreboard.pdf)
CHINA
Even though China´s slowdown is intensifying, in the short run the nation continues to do well. In 2011 the GDP grew 9.2% and the projection for 2012 is 8.1%, impressive numbers in a world with stagnant economic growth. The country also relies very little in foreign borrowing, but the concern with China economic system comes when thinking in the long run. The country is surprisingly inefficient, ghost cities in the northern region and decadent resorts in the south are a waste of capital. The country also faces the worry of an aging population. Thanks to the One Child policy, by 2050 the country may have too few people in the working age to support their elderly.
The Economist also says: “China’s economic model is also unfair on its people. Regulated interest rates enable banks to rip off savers, by underpaying them for their deposits.”
As this famous proverb says: “the darkest hour is just before the dawn”.
So let us hope that the dawn will come out soon, and that the global economic system will continue to prosper.
In my next post, decisions will have been made by our leaders, and hopefully they will have a good outcome for the world economy. Ill keep you posted.
Sources:
http://www.economist.com/node/21555915
http://www.bbc.co.uk/portuguese/ultimas_noticias/2012/06/120611_focus_pib_lgb_rn.shtml
http://revistaepoca.globo.com/Negocios-e-carreira/noticia/2012/03/pib-do-brasil-cresce-27-em-2011.html
http://www.band.com.br/noticias/economia/noticia/?id=100000509450
http://www.indexmundi.com/commodities/
(http://www.bls.gov/).
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