B. Strengths and Weaknesses Essay
Paper type: Essay
Words: 667, Paragraphs: 9, Pages: 3
Sorry, but copying text is forbidden on this website!
A main strength behind the currently surging global economy is the global market environment which remains very favorable, characterized by unusually low risk premiums and volatility. Global short-term interest rates have continued to rise, led by the United States.
However, despite some recent increase, long-run interest rates remain below average. Interest rate spreads—in both industrial countries and emerging markets—remain close to historic lows, reflecting improved fundamentals accompanied by buoyant inflows to emerging markets (World Economic Outlook, “2006” 4).
Given such a favorable environment, equity prices have risen significantly, particularly outside the United States. Essentially, though, strong equity markets are underpinned by the high performance of the corporate sector, which is presently accumulating record net savings. Although the world economy expanding, thanks largely to efficient and profit-making private sector in many parts of the world, it is dangerously imbalanced. The U. S.
current account deficit — which reflects the gap between the nation’s high appetite for imports and its low savings — is now at levels which could affect the dollar, increase interest rates and even start off a global economic downturn.
To many economists, the swollen U. S. current account deficit looms as the biggest potential weak link in the chain of global economic growth. It is believed that the U. S. and the world cannot go on like this indefinitely. However, the problem is not expected to be reversed meaningfully in the near future. The rising U. S.
current account deficit is associated with large surpluses in oil exporters, China and Japan, a number of small industrial countries, and other parts of emerging Asia. This current account deficit must ultimately fall substantially to stabilize its net investment position, while surpluses in other countries must fall too. The problem of U. S current account deficit is related to the issue of serious global imbalances. Adjustment in these imbalances will in all circumstances require both a significant rebalancing of demand across countries, and a further substantial depreciation of the U.
S. dollar and appreciations in surplus countries. Apart from the major concern of global imbalances, two more issues emerge as particularly weak points that pose grave danger to sustainability of global economic growth: vulnerable emerging markets and volatile oil prices. Thus far, none of these risks has weakened growth performance. However, this fact should not lead to complacency. Investment is pouring into risky emerging markets as if the past decade’s turmoil in Argentina, Turkey, Thailand and Russia never happened.
Capital flows this year into developing nations in Latin America, Asia and Central Europe are expected to hit a record $345. 2 billion, according to the Institute of International Finance. That surpasses the previous high set in 1996, just before the Asian financial crisis, and is up 62% in the past two years. However, the simple fact is that emerging markets remain extremely vulnerable to sharp changes in the global environment (Lynch). . Energy prices have risen sharply since 2003, driven both by strengthening global demand and most recently by concerns about future supply.
With limited excess capacity, the medium-term supply demand balance is expected to remain very tight, and oil prices will persist near current levels. It is sometimes said that all that stands between a barrel of oil and a triple-digit price tag is a strike in Nigeria, unrest in Venezuela or revolution in Saudi Arabia. Higher oil prices also have a significant impact on global imbalances. Such weaknesses bring about a great element of uncertainty to the global outlook. A scenario can be imagined where the U. S.
huge current account deficit could sink the dollar. As it plummets, emerging markets’ exports dry up and oil prices, which are denominated in dollars, would rise. In no time, what may starts as one country’s difficulty can escalate into a global contagion. Also various potentially threatening epidemics, notably avian influenza, have received much attention recently. Although their threat appears remote at the present time, in the worst case scenarios their impacts on the global economy would be unimaginable.