WORLD ECONOMY

The economic condition of the world is going through a turmoil which is pricking each one. In order to imbibe the realities related to the crises the world is running through, we have to briefly get to the hidden culprits.

Now, we will wade through the technicalities of the facts of the world economic scenario. Equally necessary is to catch hold of the round the corner lurking dangers by connecting the past lacunae with present scenario and various critical numerical facts.

In the midst of the euro crises, Good news is that US Economy has started picking up.

US ECONOMY PICKING UP


Updates: US Consumer Price Index soaring high, has reached to 64.5 in December 2011 from 55.2 in November 2011.


OECD has forecasted Global Growth at 3.4% in 2012, much below the previous forecast.


Trade deficit decreased to $ 43.5 billions in October 2011 from $ 44.2 billions in September 2011.


Real GDP Stands at 1.8% in Q3, 2011.


Current account deficit decreased by $ 14.4 billion to $ 110.3 billion in Q3.


Consumer confidence jumped to 72 in December 2011, the highest level since the onset of recession.


Employment in the private sector rose by a seasonally adjusted 200,000 jobs in December 2011, the largest gain since last December 


Index of Pending home sales data of October 2011 has risen by 7.3% after rising by10.4% in September.


Theoretical Reasons for Recession : In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way. Production, as measured by gross domestic product (GDP), employment, investment spending, capacity utilization, household incomes, business profits, and inflation all fall, while bankruptcies and the unemployment rate rise.
Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies such as increasing money supply, increasing government spending and decreasing taxation.
Each recession has its own specific causes, but all of them are usually preceded by a period of irrational exuberance This is also known as a-business cycle. Economic recessions are caused by a decline in GDP growth, which is itself caused by a slowdown in manufacturing orders, falling housing prices and sales, and a drop-off in business investment. The result of this slowdown is rising unemployment, which causes a slowdown in retail sales. This creates a downward spiral in manufacturing and increased layoffs. A stock market decline, known as a bear market, can either be a result of a recession but is often a cause itself.
Irrational exuberance in 2004 and 2005 in the housing market led many people to buy houses they couldn't afford, because everyone thought housing prices could only go up. In 2006, the bubble burst as housing prices started to decline. This caught many homeowners off guard, who had taken loans with little money down. As they realized they would lose money by selling the house for less than their mortgage, they foreclosed. An escalating foreclosure rate panicked many banks and hedge funds, who had bought mortgage-backed securities on the secondary market and now realized they were facing huge losses. By August 2007, banks became afraid to lend to each other because they didn't want these toxic loans as collateral. This led to the $700 billion bailout and bankruptcies or government nationalization of Bear Stearns, AIG, Fannie Mae, Freddie Mac, Indy Mac Bank, and Washington Mutual. By December 2008, employment was declining faster than in the 2001 recession. In 2009, the government launched the economic stimulus plan. It was designed to spend $185 billion in 2009. And in fact, it halted a four-quarter decline in GDP by Q3 of that year, thus ending the recession. However, unemployment continued to rise to 10%, and many business leaders still expected a W-shaped recession by the end of 2010. High unemployment rates still persisted into 2011.
The recession of 2001 was caused by irrational exuberance in high tech. In 1999, there was a economic boom in computer and software sales caused by the Y2K scare. Many companies and individuals bought new computer systems to make sure their software was Y2K compliant. As a result, the stock price of many high tech companies started to increase. This led to a lot of investors' money going to any kind of high tech company, whether they were showing profits or not. The exuberance for dot.com companies became irrational. It became apparent in January 2000 that computer orders were going to decline, since the shelf life of most computers is about two years, and companies had just bought all the equipment they would need. This led to a stock-market sell-off in March 2000. As stock prices declined, so did the value of the dot.com companies, and many went bankrupt. 
High interest rates are also a cause of recession. That's because it limits liquidity, or the amount of money available to invest. In spite of the stock market decline in March 2000, the Federal Reserve continued raising interest rates to a high of 6.25% in May 2000. The Fed didn't start lowering rates until January 2001, and lowered them about 1/2 point each month, resting at 1.75% in December 2001. This kept interest rates high when the economy needed low rates for cheap business loans and mortgages.
One of the causes of the 2008 recession was that the Fed was also slow to raise interest rates when the economy started to boom again in 2004. Low interest rates in 2004 and 2005 helped created the housing bubble. Irrational exuberance set in again as many investors took advantage of low rates to buy homes just to resell. Others bought homes they couldn't afford thanks to interest only loans.
What will cause the next recession? It's hard to say exactly where it would occur, but you can bet it will be some combination of low interest rates, irrational exuberance on the part of investors, and high interest rates that pop the bubble, lead to panic and cause a recession.
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During, recessions, many macroeconomic indicators vary in a similar way. Production, as measured by gross domestic product (GDP), employment, investment spending, capacity utilization household incomes, business profits, and inflation all fall, while bankruptcies and the unemployment rate rise.
Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies such as increasing money supply, increasing government spending and decreasing taxation.

EUROPEAN DEBT CRISIS


Updates: Germany, the strongest economy of Euro Zone, has contracted by 0.25% for the first time. Germany has posted a negative yield. The industrial order fell by 4.8%. Germany’s CPI has come at 0.7% in December 2011, while the same was at 2.1% year on year.


Real GDP rose by a meager 0.2% in Q3, while last year it was 1.4%.


Euro zone has stepped up pressure on Hungary for flouting rules on Central Bank independence and deficit overrun.


The unemployment rate of euro zone was at 10.3% in November 2011.


Euro-zone consumer confidence took a hit, falling to a reading of -21.4 in December 2011 from -20.4 in November 2011.


Theoretical for Euro Zone Crises:  Financing, not debt, is the cause of Europe’s crisis. The accent cannot fully be on debt as such but on the role of the banks in the pre-crisis European and global economy, and on government responses to the fragility of their banking sectors. The current sovereign debt concerns are symptoms of the problem, namely the fragility of the European banking system, which is the result of a transformation in the role of financial institutions, what we can call financing. To start understanding Europe’s current predicament, we need to go beyond the knee jerk belief that government bail-outs can make the problem go away and look more closely at the actual causes of the current crisis.
Prior to 2008, there were great differences between countries in what is now the fragile periphery of the Euro zone. Ireland did not have high levels of government debt before the crisis, Greece and Italy did. The connection between the 2007-8 financial crisis that was sparked off in the sub-prime mortgage market in the US and today’s Euro zone sovereign debt crisis is through Europe’s banks. They were shaken by the first part of the crisis, with governments intervening, in order to stabilize their balance sheets. One of the first banks to fail in 2007 was a German bank. In France, policymakers at that time complimented their banks for what seemed to be limited exposure to US sub-prime mortgages. Today, we see that French banks are no different from their peers, only that the risk they took on was more heavily concentrated in Southern Euro zone economies i.e., Spain, Italy and Greece. 
What is driving the Euro zone crisis at the moment is the fear of contagion. A Greek default alone would not topple big Northern European banks, but if Italy and Spain defaulted, the French government would be called upon to intervene in order to recapitalize its banking system. French government debt would soar and it would move from creditor to debtor in one swift move.
In May 2010 the Euro zone countries and the International Monetary Fund agreed to a €110 billion low interest loan for Greece, conditional on the implementation of harsh austerity measures. The Greek bail-out was followed by a €85 billion rescue package for Ireland in November and a €78 billion bail-out for Portugal in May 2011. Also in May 2010, in exchange for promises by its troubled members including Greece, Ireland Portugal, and Spain to implement significant austerity and other fiscally responsible measures, the EU approved a comprehensive rescue package worth €750 billion. It is aimed at addressing the events in Greece but also generally ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF). The funds would be available to rescue Euro zone economies that get into financial trouble. The plan would consist of €440 billion of loans from Euro zone governments, €60 billion from an EU emergency fund and €250 billion from the IMF.
It’s important to understand however, that the EFSF is simply a borrowing facility and doesn’t have any real money in its accounts. In other words, it would first have to borrow money through a bond issuance in the financial markets and then in turn, loan it out to the European countries that are having trouble borrowing.
Although the financial markets generally received the news positively, several questions remain among investors. First, will these troubled countries actually make the difficult fiscal changes they have promised? Second, how willing will future bond buyers be about loaning money to an intermediary such as the EFSF whose purpose is to loan money to countries with poor credit? Ironically, some of the guarantors of the fund are the same countries who themselves are having difficulty from investors. Fortunately, other European countries like Germany, Austria and France, which are in much better financial shape, are guaranteeing the fund as well. Third, many question the logic of addressing fiscal problems created by excess debt by issuing more debt.

CHINESE ECONOMY


Updates: China's CPI went up by 4.1%, it was 5.4% the previous year.


The Purchasing Price Index rose by 1.7% year on year and fell by 0.3% month on month.


Mainland Chinese and Hong Kong property stocks trade mostly lower after fresh doubts surface that real estate prices in the region will be able to escape the global maelstrom in 2012.


December 2011 PMI of China climbed to 50.3, compared to 48 in November 2011. 


Theoretical:  China is under the appearance of a soft landing as planned but China’s banking system, private enterprises and real estate market has tremendous latent crisis. Beijing government certainly will not ignore these issues, but gradually resolve these crises. Triggering may affect the economy and hamper growth. Investors expect the authorities to relax monetary policy, but the government until now only made some of the edge fine-tuning. China recently obtained control of the high inflation caused by the record banks lendings, which resulted in double-digit economic growth. To control high inflation, the Beijing government since last 10 years, has raised interest rates five times, 9 times raised the deposit reserve ratio, and ordered the bank loans within the mandatory limit. This led to the availability of bank loans only to state-owned enterprises, making it impossible for smaller companies to get private loans. Thus, successive bankruptcy caused by lack of loans to small private enterprises has become a concern. Further, Chinese government's measures to control the real estate bubble by curbing the housing prices may lead to the collapse of the housing market.
China's exports have been falling rapidly in recent months, and especially sales to Europe. That may throw a wrench in China's plans to rebalance its economy. Amid strong export demand, it would be easier for China to relax the rules that artificially constrain consumption. Given a broad slowdown in key export markets, however, China may be reluctant to give up any of the edges that its manufacturers enjoy. China would like to switch over to more consumption based economy than being export oriented but may find it difficult. Government spending and investment have propped up the economy since 2008, but current levels of expenditure aren't sustainable. And efforts to increase consumer purchasing power will further hamstring exporters facing a darkening global outlook. Of course, if China slows the pace of its currency appreciation, that will antagonize the strongest of its large export markets America. The American economy is better able to power demand than Europe, but with American unemployment high, its politicians are in no mood to worry about economic troubles abroad. This is obviously a mess that is, in no small part, of China's own making. Yet it also shows yet again the extent to which the global economy's short-term outlook hinges on developments in Europe. 
China PMI in surprise fall, lowest since 2009.

JAPANESE FORECAST


Updates: The CPI for December 2011 was down 0.4% year on year which signals deflation.


Theoretical:  The Japanese government downgraded its assessment of the economy for the first time in six months, saying weakening global growth is slowing down a recovery in factory output and exports. The Japanese economy is still picking up although the pace of recovery decelerates, while difficulties continue to prevail due to the earthquake and tsunami. The Bank of Japan maintains that the economy is in a moderate recovery, although at its last policy review, it highlighted increasing threats from Europe's sovereign debt crisis and weakening global economy.
Japan faces risks from weak overseas economies but recovery would continue. Japan's growth slowdown didn't generate the public outcry one might have expected because beneath the headline figures the Japanese economy was rebalancing itself towards greater reliance on consumption. As a result, Japanese consumers felt as if they were continuing to grow richer even while output growth slowed dramatically.