The downgrade of American bonds along with the problems of the European over-indebtedness increases the fear of a recession or a sharp slowdown in the global economy.
Much of the market turmoil responds to the fear of investors, who facing a recession scenario go in pursuit of safer currencies and assets.
In this scenario the gold price increases. The Swiss franc and the dollar appreciate against other currencies, among them those of Latin America. The interest rates of long-term bonds drop, and stock markets rise and fall in all world markets.
Other values fall anticipating lower demand. For example, on Monday, August 8, spot copper price ended down 2.08% on the London Metal Exchange, to US$4.01 a pound, representing its lowest price in the previous three months, and oil fell below the barrier of US$100 dollars which had not happened since February 2011, when the unrest began in the Arab world.
However, many of these movements are temporary, in fact one day after the black Monday that world stock markets experienced on August 8, some markets were recovering and others were waiting the decisions by the Federal Reserve.
On the other hand, other indicators show less temporal trends, and warn about the situation the world will be facing in the coming months or years; although markets stress is relieved.
The huge budget cuts in the United States and Europe, which will affect public works, social programs and wages, mean fewer jobs and less consumption, and therefore demand, production and growth will drop too.
In addition, much of that money will be used to pay public debt and not to create employment. and the private sector cannot generate at all the jobs generated by public investment.
In this scenario, the diminishing international demand followed by readjustment of the trade balance between rich, emerging, and poor countries is inevitable. There is no internal or regional market that can absorb what the Europeans or Americans do not buy.
And there is no developing or emerging market capable of withstanding the impact – except perhaps the major producers of commodities and energy. They would be hit by the fall in prices and export volumes, but they still would have the most valuable assets for the coming world, as the world does not work without energy or food.
It is rather surprising that in such a situation Russia is willing to sell up to 85% of its oil giant, Rosneft, under the new privatization plan of President Dmitry Medvedev.
There are hundreds of indicators that describe the future scenarios of which the following are just a few.
United States: Employment is not recovering on schedule and in the second quarter is characterized by fall in productivity, while high labour costs persist, and consumption declines.
Europe: The budget cuts can only afford to reduce the fiscal deficit and pay debts.
In July 2011, manufacturing output fell in Russia for the first time since December 2009 as a result of slower growth in China and lower European demand. Also in July, Europe witnessed weakened growth in the services and manufacturing sectors, advancing at its slowest pace in almost two years.
In August 2011, inflation unexpectedly surged in China, hitting 6.5%; food prices and the cost of workforce increased. The economy is cooling, with a slowdown in GDP growth in the second quarter, and price increases are expected in the coming months. The manufacturing sector also slowed down as production and export orders advanced at the slowest pace in several months.
Finally, the Organization of Petroleum Exporting Countries (OPEC) recently released its monthly report for August, announcing “dark clouds over the global economy.” [i] The report argues that underlying problems faced by the global economy will affect the oil market and the Organization has revised downwards its forecast for oil demand for this year and the next one.
OPEC estimates that in 2011 global oil demand will be around 88.14 million barrels a day, representing about 1.2 million barrels a day more than last year, but about 150,000 bpd less than its last month forecast. For 2012 it envisages an increase in demand of 1.3 million bpd, representing another 190,000 bpd less than estimated in the previous report.
OPEC analysts argue that according to the most recent economic data and indicators there is “a significantly higher risk of a broadening weakness in the Organization for Economic Co-operation and Development (OECD)” with “inevitable implications” for the developing countries and the world economy as a whole.
The storm is already impacting the global economy, not just the markets.
By Raul de Sagastizabal
[i] Dark clouds over the economy impacting market direction”, http://www.opec.org/opec_web/static_files_project/media/downloads/publications/MOMR_August_2011.pdf