Is the world heading into a world reccession?

Moreover traditionally in the crisis times investors prefer to buy gold. In the investment world gold have been always used as a defend tool from the upcoming crisis, from the end of august 2007 prices for gold increase by more than 45%.  Economic analysts think that gold prices will continue to rise until the stabilisation in the world stock markets.

Another main factor of recession is unemployment. According to the Guardian United States experience the biggest fall in unemployment since July 2003.  The adjusted unemployment rate head to 5.1% in March. March was a third month in the row of the declining job numbers. These figures speaks for themselves, it is clearly pushing everybody to acknowledge that the economy is in the recession. The main question now is: how deep this recession will be and how long it will last?

Furthermore, even the chairman of Federal Reserve Ben Bernanke now has admitted the pessimistic outlook of US economy. Few months ago US government started the Economic stimulus program, but same time refused to admit that economy in its early recession stage. However now the outlook changed and Mr Bernanke admitted for the first time that ‘recession is possible’.  It would be difficult for Fed Reserve to say that it not after it rescue the investment bank Bear Sterns. The collapse of Bearn Sterns would cause a big damage to economy and financial sector.

From all these factors we can say that probably recession in USA is already started. US Federal reserve focusing now on stabilising economy downturn and reacting quite calmly on the rising inflation and falling dollar. The change of demand and supply balance in the assets market will lead to even bigger financial crisis and to the situation of sharp US economy decline and growth slowdown in the World economy.

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Decoupling

The controversy of decoupling is wherever or not recession in US will drag the emerging market economies and well developed countries economies into recession. Some specialists argue that emerging countries economies not depend on the US and the US economy growth slowdown will not have a big effect on them. The opponents bring the globalisation argument into discussion. With globalisation economies of the whole world is more dependent on each other, it is impossible that slowdown in US economy who contributes around 20% of world GDP, would have no effect to the world economies.

Emerging countries economies

The main four emerging economies China, India, Brazil and Russia are accounted for two-fifths of world GDP growth in 2007.  From the graph 1 we can see that only small number of they exports account to USA.

Even the exports to America slowdown, but exports to emerging countries increased significantly. Those losses will hardly harm the developing countries’ economies.

                      

Source: The Economist.

So will the emerging markets will be able to operate independently from US economy? Let’s look at China.  China is tighten to US almost just through exports. But exports accounts just 15% of China investments, and not all exports are to America. The other part of China investments are linked to infrastructure and property. Growing domestic consumption will contribute to further grow in China’s economy.  China now a big player in the commodity markets, as it shift from manufacturing to heavy industry requires a lot of resources. The increases in commodity prices influence the shift upwards of Chinese stocks by a 4.5%.  However the Chinese stock markets wasn’t performing very well in the first months of this year. Tighter credit conditions and liquidity problems in China, are quite common to the West countries. Of course China will easily recover from these problems, but was it influenced by domestic economy conditions, or is it ‘echo’ from the western countries economies.

The other emerging economies as well will be not very affected by slowing exports to US as instead they are increasing trade with each other. Also large western companies may look to offset their losses at home by investing funds to emerging countries. It can play a positive role for the developing countries’ economies. However most of the emerging markets highly depend on the high commodities and oil prices, if these prices will go down sharply it will have a very bad impact on the developing world. Only in Russia the oil and gas accounts for 31.6% of Russia’s GDP, and natural resources account for 80% of exports.  This outlook makes the emerging countries economies look more vulnerable.

Developed world economies

The Eurozone economy seems to be not so confident about economic growth in 2008. The rising prices for food and oil has caused the slowdown in consumer expenditure. The European Central Bank brings some optimism by stating that low unemployment rates will help to boost consumption. The good thing is that strong Euro performance helped European Central Bank to resist to interest rates cuts. The outlook for 15 countries in Eurozone is that effect of US recession on them will not be significant.

The UK economy outlook does not look very optimistic.  Uncertainty in housing market, tight credit conditions and collapse of Northern Rock had affected consumer confidence. Bank of England cut down interest rate to ease economy situation and create additional liquidity in financial sector. But in the past few months the UK pound sterling dropped significantly from it strong currency position.  The UK economy seems to be facing risky times. Historically UK and US economies was interrelated, that is why there is no doubts that troubles in US had an impact on Great Britain economy.

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Conclusion

Is the world heading to the world recession?

Most certainly what we can conclude is that USA is definitely heading into that direction. The evidence for it is slowdown of economic growth in US, the rising unemployment figure, and crisis in financial sector, real economy difficulties and economic uncertainty.

The main debate is will the US drag the whole world economy into recession. In my opinion the US recession will have influence at some extent to other countries economies. I think that the shrink of the leading economy in the world definitely will affect the other countries and the most vulnerable will be with a large export to US. The world economy probably will experience some economic growth slowdown, but it can recover from it in a very short time and it will be not sizable.

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Bibliography

A.B. Abel, B.S. Bernanke, D. Croushore; Macroeconomics, 6th edition, 2008, Pearson Education

A.Dunnett, Understanding the Economy an introduction to macroeconomics, 4th edition, 1998, Prentice Hall

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