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The World Bank’s latest projections suggest that the global economy is all set to shrink in 2009, with major economies registering negative growth. Earlier it was expected that the global economy may register marginal growth, but the impact of the unexpected contraction in the Japanese economy seems to be leading to a situation, where the overall picture for the global economy is emerging to be gloomier. The Japanese economy, which contracted at an annualized rate of over 12% for the last quarter of 2008, seems to in the midst of economic contraction, which is being termed as the worst since the oil shock of 1974.

The global economy has also been beset by economic indicators growing worse than their projections and leading to revisions in overall global economic growth. Recent government estimates suggest that the US economy contracted at an unhappy 6.2% rate in the last quarter of 2008.  The unemployment rate in the US jumped to 8.1% in February this year, with employers eliminating nearly 651,000 jobs. This culminates into job losses of over 600,000 for three consecutive months, something that has happened for the first time since orderly data started being tracked 1939 onwards. And this eventuality is taking place in the face of the US government’s several billion dollar stimulus packages. Experts have put US unemployment figures at a 25 year high and stock markets at a 12 year low. The key issue is that as unemployment rises, home mortgage foreclosures will only increase, and the source of the crisis, the US real estate market is unlikely to come under control. Already, some US $ 100,000 properties are up in the market at less than half their prices in places like Detroit as hundreds have been laid off in the auto capital of the world. And the buck does not stop there. Companies like General Motors and Chrysler have announced layoffs of nearly 50,000 globally in the coming months. If unemployment rises further, the foreclosure crisis could get out of hand.

While, the picture seems to be getting gloomier, there seems to be no lack of forecasts that suggest that the US economy is set for a rebound in the second half of 2009. A survey of economists seems to project that the US economy would contract at a 5.3% annualized rate in the first quarter of 2009, followed by a more benign annualized contraction rate of 2% in the second quarter. As per the same projections, the US economy would post positive annualized growth of 0.5% in the third quarter of 2009, and 1.8% in the last quarter. As per the survey, consumers are likely to increase spending due to a sharp drop in energy prices and tax cuts. At the same time, investment guru Warren Buffet forecasts economic recovery in the US to take nothing short of five years. He also believes that economic recovery could rekindle inflation due to the prevailing low interest rate monetary regime.

All these issues are set to be discussed in an upcoming G20 meet early April. Various nations are also expected to discuss the possibility of coordinated fiscal stimulus to fight their way out of the recession. Fiscal stimuli that are being proposed are likely to pose the problem of huge fiscal deficits. These deficits are deepening due to governmental tax collections falling short of targets under recessionary periods. Falling stock markets are leading to evaporating capital gains and the taxes on such gains. At the same time, unemployment doles are on the rise, putting pressure on public finances. But, a bigger problem is likely to haunt the developed economies, which does not seem to have received attention. It is the problem of ageing populations and changing demographics. Ageing populations mean lower productive hands and more to feed and look after, suggesting higher fiscal pressures on developed economies in the future.

While, the economic mess continues and risk aversion grows, the US dollar continues to gain, with investors running to the shelter of US government securities. Is this undue rise of the dollar, another bubble in the making? Growing weakness in the US economy would seem to suggest this!

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