Consumers in debt, Economies in strain

Critical issues in global financial markets and the overall macroeconomics have been discussed in the ongoing WEFORUM in Davos, this year. Top policy makers and experts gathered at the forum to find solutions for the ailing US economy which is into a major recession since the housing trouble propped up last August, 2007. The Federal Reserve is trying its best to avert a major slowdown in the US economy by large cuts in short-term interest rates periodically, only to boost business and consumer confidence.

Knowing the potential impact of US recession on the global economy, particularly the major export dependent countries like China, India, Thailand, Japan and others, Fed's policy response are targeted to buffer the global economies in the event that the economy does not face a severe credit crunch. Severely stressed banking system in the US are prone to capital squeeze as the mortgage crisis revealed some major investment banks like Citi and Merrill Lynch 'writing off' subprime defaults from their balance sheets and downgrading value of assets.

Inflation Issue in Emerging Economies:

Issues revolving around high crude oil prices and inflationary threats of higher commodity prices have been the topics for much debate. Also, analysis of a threat to Chinese growth in the light of a global recession and ongoing inflationary pressure across the emerging markets are looked into. Managing food inflation in China, which rose to 9.1%, and in Vietnam-9% remains some challenging issues for Beijing and Hanoi? According to Bloomberg, consumer confidence in the US are down somewhat and unemployment rate hit the decade high 0f 6%. With recession shadowing on the streets, corporate sectors are worried about a possible impact on their profits.

How China can drive up Inflation globally?

It has been assumed by some analysts that, China might be exporting inflation outside and pass off the higher export costs onto the consumers, due to rising manufacturing costs, high food prices and higher attrition levels in China. With an ever increasing demand of commodities and fuels from China, raw commodity prices have started increasing substantially and meeting the demand seems to be the key factor presently. Companies are passing off this higher cost of production to the consumers, and the resultant increase in Chinese export prices could propel inflation further outside its domain.

A look into financing the US consumption:

US is still financing its consumption by credit, while savings are negative. It may be the likely option for US consumers whether to finance their consumption through credit or by income, since this would make the situation still worst. The Bush administration have considered lowering taxes to boost investments and cutting down government spending, but a recent announcement by Bush administration signalled a US$3 trillion spending plan, that may further deteriorate US budged deficit.( Yahoo news)

The Housing Trouble:

With falling housing prices and oversupply of homes and condos, commercial and residential property outlook face a grim situation. ‘Subprime fiasco' has resulted in increased defaults on US high-yield bonds and banks who have invested in these junks are facing the fire. The situation has be summed up somewhat like this:

"Homeowners defaulting on ARM repayment schedules (amortization), selling their remaining home equities, causing oversupply of houses and condos, falling demand in property and asset prices, slowdown in residential and commercial constructions, workers being laid down, and those workers stop spending, downgrading consumption sentiment paving the path to a full blown recession", The Moneyweek (adapted).

Impact of Consumption squeeze:

The consumption squeeze by laid-off workers could have severe impact on corporate sales and profit. And compounded with falling dollar driving up import costs, Americans and Europeans both are likely to cut down their 'Chinese shopping spree', since the dual effect of higher Chinese export prices and increasing import costs might strain the purse of consumers. It is likely to be seen how the systemic effects of Fed's monetary policy easing could anaesthetize the painful economy already battered by multitude of problems.

Sources: Moneyweek.com, Bloomberg.com, weforum.com(Davos)

Right Horizons Desk