Thanks to that triple-whammy of weak economic figures from the US yesterday, double-dip recession became a trending topic in the Forex world once again. The US leading indicator, jobless claims, and Philly Fed index all posted dismal results, and hinted that the US could get sidetracked on the road to recovery. And if big ole Uncle Sam’s stuck in a rut, the rest of the global economy could be in trouble too!
1. Austerity Measures
Judging from the recent economic data alone, it’d be easy to conclude that both the euro zone and the UK are getting back on their feet. Even better, the UK is already up and about, tapping its feet to the rhythm of groovier-than-expected retail sales and GDP results. The euro zone also enjoyed it share of upbeat data as Germany and France, its two largest economies, printed strong growth figures for the second quarter of the year.
But if there’s anything that could ruin their party, it’s the impact of the austerity measures designed to trim down their bulging government deficits. You see, both the euro zone and the UK have already started the ball rolling with their belt-tightening measures, which involve spending cuts and tax hikes. Imagine how this could put a serious dent on consumer spending, inflation, and overall growth! Could these austerity measures could go as far as erasing the recent economic progress of euro zone and UK? That remains to be seen.
2. Currency Appreciation
The second threat that concerns me is that of currency appreciation, which will probably affect the economies of Japan and Switzerland the most. During the past couple of weeks, currency intervention has been the talk of the town as the yen and Swiss franc have absolutely been killin’ it lately.
Part of the reason why these currencies have been doing so well is the surge in risk aversion. As more investors decide to play it safe and take out their positions in higher-yielding assets, they end up covering their short yen positions. The franc on the other hand, seems to have regained its status as a safe-haven currency. It has benefitted from concerns on euro zone debt and recovery, as well as Switzerland’s reputation as being a politically neutral nation.
Why is this cause of concern for the global economy? Well, currency appreciation presents a real threat to economic recovery because it makes exports more expensive. Think about it: If you were to choose between goods of two countries, you’d have to factor in exchange rates in order to make a price comparison. Obviously, the country with the stronger currency would have a higher price for its products. Seeing as how both Japan and Switzerland have export-dependent economies, the higher their currencies climb up the charts, the harder it may be to remain competitive.
3. Weakness in China?
A slowdown in China’s economic growth is one big headache that comdolls can do without in times of crisis. After all, commodity-related nations such as Australia, New Zealand and Canada are dependent on Chinese demand to support their economies.
With an average growth of 10% for the past 30 years, China has no choice but to aggressively import commodities like oil, iron, coal, and ore to support its growth. This is a boon to the commodity-related economies since Canada holds the second-largest oil reserve in the world while Australia can dig up minerals more efficiently than all of Snow White’s dwarfs combined. Of course, lil’ ol’ Kiwi can also hitch the ride since Australia and New Zealand are tight trading bros.
But if China’s economic growth is slowing down as the recent CPI, manufacturing sales, and GDP reports suggested, then these comdolls are in for a big bump. In fact, the Reserve Bank of New Zealand already said that it would pause its interest rate hikes due to economic uncertainty. Uh-oh, is “Toy Story 4: China and the Three Comdolls” headed for a sad ending?
Hmm, it does look like each of them has their own problems to deal with. If you ask me, the saying “Mind your own business” shouldn’t apply in this case, especially in a highly globalized market. Government officials should be conscious of the other economies’ development so they can adjust, adapt, and survive the economic rainstorms. As I’ve said time and again, we’re all in this together!