With the global economy still facing strong economic headwinds from the likes of high unemployment, sovereign debt, weak international trade and indebted consumer, will the global economy be able to fully recover?
The financial crisis started in the big financial institutions in 2007 and subsequently moved into the real economy towards the end of 2008 and caused all developed nations to enter in to recession. This was disastrous for many businesses as the tighter credit conditions and reduced demand for goods and services forced companies to downsize their workforce, which in turn doubled the rate of unemployment in the UK and US. Nevertheless, since the beginning of 2010 there has been an air of optimism about job growth across the pond as the massive US stimulus package has generated approximately 2.7 million jobs (Non seasonally adjusted) and the outlook for future growth remains positive. The picture in the UK is not as promising, however, in recent business surveys the manufacturing and service sectors are in a growth cycle and many businesses are starting to rehire to meet this newfound demand. Job recovery normally lags behind economic growth by 6 to 12 months, therefore it is suspected that the UK will start to see unemployment starting to reduce by the end the year.
From the outset of the “Great Recession” it was important that government played an important role in stimulating the Economy by using a combination of tax cuts and spending to try and smooth out the decline in the economy. Moreover, many countries found it necessary to step in to stop the failure of the banking sector and to protect the public’s savings held in those institutions. Excessive Sovereign debt is a serious risk to future global growth as it reduces the ability of the government to provide services and many countries waste a large amount of their tax receipts servicing this debt. Over recent months nearly every single European country has announced massive plans to try and reduce public debt. This will not happen over night and will be a long drawn out process but with the government’s willingness to reduce borrowing this should provide benefits in the long-term, as governments will be forced to be more efficient and effective with the tax collected.
During the dark days of the global recession, international trade collapsed, with some regions reporting a 30% reduction in exports. This weak environment causes lasting damage to large and small companies alike. Nevertheless recent signs from the emerging markets suggest that trade is starting to gather pace, with countries like China and India growing rapidly on the back of international trade. Furthermore, the biggest consumers in the world (the US) are starting to put their hands in their pockets to purchase big-ticket items such as cars and widescreen televisions. This positive upward trend in retail sales across the globe is supporting the idea that the economic recovery is stronger than first predicted.
One of the many concerns in the UK is the current level of debt facing the consumers. With a decade of easy credit and a booming housing market, the average consumer indebted themselves to greater and greater extent. This debt will reduce the disposable income of the UK public in the future and could seriously damage a recovery. However, interestingly enough the average consumer has been paying their debt and saving more than ever. To expand on this idea, with house prices seemingly on the rise again and the equities enjoying a strong 12 month rally, the average consumer is now feeling more wealthily and more willing to spend their money. The retail and service sectors are still improving and the future looks far better than was predicted during the start of the recession.
The strength of the recovery is always going to be in question and there is no doubt that the economic recovery is going to be a slow and gradual process. Yet, there are currently plenty of early signs that the recovery is taking a firm hold but it might not be the growth the west is used to.
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