Home' Trinidad and Tobago Guardian : July 9th 2015 Contents BG22 INTERNATIONAL
BUSINESS GUARDIAN www.guardian.co.tt JULY 9 • 2015
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Large parts of the world are still
struggling with the burden
dumped on their shoulders by
the financial crisis; even now,
eight years after its onset.
And there are dangers not far beneath the
surface that could easily cause a new setback.
Even if those risks don t materialise, the out-
look for this year, the IMF has said, is economic
growth that is only "moderate with uneven
prospects across the major countries and
The recovery from the financial crisis and
the Great Recession of 2008-09 continues and
some areas do seem to be gaining some strength.
The US is a notable example and there are signs
that the eurozone may be putting the worst
But the global economy is still struggling to
regain the momentum it had in the last decade,
before the crisis. And then there are the risks.
The most topical case is the eurozone and
the crisis in Greece. The latest developments
suggest the eurozone will avoid, at least for
now, the turbulence that a Greek abandonment
of the currency might cause.
It is, however, a risk that remains lurking in
the background. The mainstream view among
eurozone governments and investors is that an
exit would be very bad for the Greek economy
and financial markets. But they think contagion
to other parts of the eurozone, never mind
beyond, would be containable.
Eurozone financial markets did wobble sig-
nificantly at the start of the week, but then
regained their composure. It s the bond market,
where government debt is traded, which is
where contagion to other countries finances
could take place.
There were moves in the direction you might
expect if contagion were an issue---higher bor-
rowing costs for Spain, Italy and Portugal and
lower for Germany---but they were too small
to be a problem. So far all countries bar Greece
have borrowing costs in the bond market that
US interest rates
A bigger preoccupation for financial markets
over the last year has been US interest rates.
The Federal Reserve s main rate target is close
to zero (actually a range of zero to 0.25 per
cent). It has been there since December 2008
in the depth of the recession.
The Fed will raise rates, probably later this
year. The economy is recovering and unem-
ployment has fallen far from its peak. Certainly,
inflation is very low and the jobs market is not
as healthy as the headline unemployment figure
suggests. But that just means the Fed will not
raise rates very quickly once it has made a start.
The big concern about the rise when it comes
is the potential impact on financial markets,
especially in emerging economies. Higher inter-
est rates in the US will encourage investors to
move money back there, money that went over-
seas in the first place because rates were so
If that does happen it could force down the
prices of the assets and the currencies that
those investors sell. When they sell bonds---
which are a form of tradable debt---a fall in the
price is in effect an increase in local financial
market interest rates.
So the Fed move could lead to higher bor-
rowing costs and a weaker currency, for many
emerging economies, which in turn could mean
higher inflation because a declining currency
makes imported goods more expensive.
We have already had one episode of this---
it was known as the "taper tantrum"---when
the then-Fed chairman Ben Bernanke signalled
plans to cut back (taper) the quantitative easing
programme of buying financial assets. It caused
significant turbulence in a number of emerging
economies, though they got through the episode
without any major upset.
Would they survive unscathed again? Perhaps,
but there are risks and some economies are
seen as a little vulnerable: South Africa, Turkey
and Brazil, for example.
Economic growth in China has slowed, and
that s generally reckoned to be a good thing.
The 10 per cent annual average over the last
30 years was widely thought to be unsustainable,
too dependent on extremely high levels of
The growth figure last year was 7.4 per cent
and the IMF forecast is for less than seven per
cent this year.
There is a persistent concern that the slow-
down might be bumpy; a hard landing as it s
often called. The property and stock markets
are potential trouble spots. The IMF warned
in April that "property price declines---especially
in China---could spill over to emerging markets
A more general deterioration in China s eco-
nomic performance could affect suppliers of
commodities ranging from copper from Chile
to iron ore from Australia and many more.
Why China's slowdown matters
Political events have the potential to disturb
the global economy. The current possible flash-
points are Ukraine and, as it so often is, the
Middle East. So far neither has had a major
impact on the global economy.
Indeed, one of the main economic dangers
they pose, especially in the case of the Middle
East would be a disruption of the crude oil
market leading to a sharp rise in prices. But
currently oil costs little more than half of what
it did a year ago.
For the longer term, there s a question over
whether the world will get back to pre-crisis
growth rates. Many rich and emerging countries
have ageing populations. The effect may be
partly offset by increased retirement ages, but
it could still be a restraining factor for economic
growth. BBC news
World economy: The hidden rocks
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