The 10 economic factors in the world outlook for 2011 – and the 3 dominos
Apart from geo-political risk-taking coming to a head around the 28th March, there are a number of negative headwinds building in the international economy, particularly in the United States and Europe. Despite bullish sentiment currently in ascendance in the stock markets, it is clear to many economists that the world is in for a turbulent time in 2011.
Of course, there is no one-to-one correlation between the economy and the stock market, and they tend to do their own thing for extended periods of time. However, this time around the magnitude of the approaching storm will not escape the stock market, in part because QE3, QE4 and QE5 are not likely to happen. Even if they do, the effect will be insufficient to maintain stock prices in the face of waves of indogenous and exogenous shocks to the US economy.
Additional QE shots will also be utterly useless to the economy when the macro-economic tectonic plates shift on a magna scale. In my analysis, the salient world economic and social developments coming in the next two years are going to happen due to the following tensions building to the point of explosion:
1 The sovereign debt crisis in Europe is putting great pressure on the EU financial system and is contributing to the difficulties in achieving growth in large parts of the EU. Although the EU ruling class is slowly beginning to conduct changes in the EU financial sector, it is taking far too long and it does not have the necessary political perspective and understanding to see that the structural imbalances in the eurozone are now moving to rip the eurozone apart.
Although EU institutions and their leaders are successively building what amounts to a federal system for loans to weak eurozone countries, it is more and more becoming evident that they have no real idea of the convulsions they are throwing the weaker eurozone countries into. The ECB and the European Reconstruction Bank are simply not intending to supply ailing nations with credit at reasonable rates, and the whole EU project is in great danger of failing altogether through mounting debt. There is an overhanging risk that the debt will cascade through emergency package after package until collapse and default of a debtor country is a fact, accompanied thereafter by huge social upheavals across the 16 eurozone nations and ultimately across the entire EU of 27 countries as well.
The object of the latest 750 bn euros support fund is to end the despicable scenes when the bond vigilantes, in cahoots with the rating agencies, pick off one weak EU economy at time and extract extortionate rates of interest, a fate hitherto experienced by Greece, Ireland and now Portugal. Once operational, this fund is intended to go a long way to eliminating the debt crisis in Europe altogether. Given the financial headwinds about to hit, this arrangement has not come a moment too soon. But will it be enough? The Stockholm professor, economic analyst, and author on economic growth, bubbles and crises, Stefan de Vylder, does not think so. He foresees the demise of the eurozone (see link).
China has lost confidence in the dithering US political and economic system, prone as the latter is to delays, lobbying, partisan interests and pork-barrel politics and has declared a willingness to assist Europe with support if necessary to achieve sovereign financial stability. The EU is an important export market for China and it is in the interest of China to assist the EU to weather its current sovereign debt crises.
On the face of it, the EU looks set to weather the approaching financial storm with much greater robustness than the US, even though the EU will, like most economies, be affected by any double dip in the US. But again, will the Chinese assistance be enough given the wide cracks fast developing in the EU? Furthermore, what will happen when China itself runs into great problems, which it is heading towards at rapid speed? I will continue with China later under factor 9.
2 The US first-time unemployment rate is as high as ever, 9.8%, while the real number out of work is estimated to be over 17 million people. Without any significant growth in the US economy (i.e. at least 6% per annum) these numbers are going to remain high for many years, perhaps a decade or more.
3 Every 400 000 new people out of work in the US puts further downward pressure on the US housing market as they default on their mortgages a few months down the line. Unsold US residential housing inventory is now close to four million homes and the average time to a sale 24 months. The market has 25% further down to go.
4 US large banks are still under pressure because they are still carrying toxic assets on their books (or off them) and are unwilling to lend to businesses, making it difficult for them to expand. A number of the larger banks are also being sued by other companies, for example Bank of America by PIMCO for fraud in relation to the value of the sub-prime mortgage-backed securities sold to them three years ago. Regional banks are also under pressure and another 500 are estimated to hit the wall in 2011.
5 Over 40 US states are bankrupt and will have a combined deficit of $200bn in 2011. How is the US going to deal with this? If more money is printed then the national debt will increase.
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Source: Paul Sandison, December 29, 2010.
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