Current Economic Issues Essay Example for Free

Current Economic Issues Essay The current state of the world economy is attributed to economic shake ups dated from 1990s. Such happening shave extended their roots, now firmly clinching on the economy, and thus posing a threatening challenging to the whole world. Such events include the global and United States recession in 1991, Japanese economic stagnations four times since 1990s, currency crisis in European monetary system, mediocre economic performance of Europe and the large swings in the values of G3 currencies. The economy of the world had still not recovered from the 1998s global financial crisis that was caused by economic crisis in Russia. In 2001, IT bubble was experienced in US, leading to sharp fall of investment. The economic troubles challenging us today heavily rest upon the oil shock since 2000 that contributed to global slow down. To add on the pain, china appreciated its currency in 2005 by 2. 1% (Radetzki, 2003, p. 18). The above scenarios have been driving us to the destination we are today although they happened some years ago. This is because when a major economic player experiences a shock; such shock is expended to the rest of world market players, diversifying the impacts. Unemployment is getting on rise in many economies of the world, including even the giant ones. Inflation is increasing at fast rates, with United States experiencing the worst ever after the great depression. The exchange value of several currencies is getting weaker and weaker, with many stock markets closing up their ventures due to economic and financial difficulties. The industrialized economies are stake, with oil crisis holding their economies at the neck (Mullenbach, 2003, p. 20). Global economic growth 0 macroeconomic variables The above graph illustrates the trends which can be assumed by any economy, including the global economy. The long run path shows where the economy can operate at times of equilibrium, without deficits or surplus. Because of the economic forces, the trend has never been attained in history. Point A is a point of depression, C shows recovery, D is a point of economic boom and B is a recessionary trend. The world economy is subjected t all above points by the changing economic conditions of the world market and natural disasters. Today, the economy is possibly at point B, where it is at recession, but the fate is not yet known. Such a scenario is being contributed to by the nature of the economy itself, energy sector, rate of exchange, equity market and emerging markets as discussed below (Howe, 2001, p. 25). Discussion In the world economy, consumer confidence to the production sector has drastically reduced by a margin of 2. 7% since 2007, meaning that the situation is likely to get worse and worse. The recessionary experience in the United States is leading a sharp slowdown of growth in developing as well as developed nations. According to reports released by the IMF and World Bank, current and fiscal accounts of the amalgamated global economy have registered deficits since the year 2005. According to their argument, many nations like US are using weak recovery strategies that only ensure growth of output without creation of job opportunities. In 2003 and 2004, the world made a significant move against downturn, only to be fast back driven by the realization that the strategy was a jobless strategy. Through their economic monitory program, the Breton wood institutions discovered the economy was slowly healing in 2006 with low inflation and good growth, only to be stroke down by spike in oil prices. In struggling against this, the Katrina hurricane ignited its flames. The procedure of events in the world economy has led it to a hard landing especially in the years 2007 and 2008. as we talk of macro effects of the bust in the hosing sector of the united states, the world can not decouple from the effects, because US serves as a world economic hub as well as destination. Within the economic frontiers, unemployment, inflation exchange rates and growth cut rates are challenges surrounding our economic environment (Hansen, 2004, p. 12). As a matter of great concern the global energy sector has since 2004 exposed the global economy to stagflation, because of the spike in oil price. Stagflation is a scenario characterized by both inflation and recession periods. Within the range of 2004 to 2008, the oil price has been hovering around $70 per barrel. The oil crisis has been attributed to the 2000 oil price shock which affected oil importing countries negatively and led to the 2002 recession. Because of the expectation of a war in Iraq, supply shocks in Nigeria and Venezuela, oil prices went further in 2002 and 2003. After the war, the prices spiked further in 2004 and 2005 because the product remained in high demand from US and China. As a result global spare production and refining capacity has reduced as the world believed terrorism concerns in Saudi Arabia and Iraq could lead to shortages in supply. Oil is recognized as a prime mover of production sector. Production activities are essential elements making up the economy. A decline in production either quantity wise or quality wise serves as an obvious economic pitfall. Again, oil is very expensive commodity that leads to high inflation levels, a situation being experienced by the world by now. Every economy is moving fast to slow down the rates of inflation, with a big challenge coming from the instability of the oil market. Energy inflated inflation is a current which is disturbing economic strategists all over the world (Portney, 2006, p. 14). Most of the available information and data about the recent or current economic trends is availed by non governmental institutions, economically integrated institutions and Breton wood institutions. After investigating the moves of the exchange rate in the world market, the above participants have signaled a danger, due to a reflection of the reality on grounds. Exchange of an American dollar against Yen and Euro has declined, leading to large current account deficits as private savings are sinking towards zero. According to their projections, the current account deficit in global accounts may be unsustainable, lead to currency values crash or a spike in interest rates, a very hard landing for the world economy. Devastating trends in exchange rates was sensed in 2002 – 2004, when the American dollar peaked suddenly and later on sharply declined. Interest rates and real growth rates differentials favored the dollar in 2005, but it resumed its fall in 2006 as Fed pause and US slowdown was signaled. As the situation stands as per now, the dollar is expected to continue falling. This is because any global current account imbalances will be disorderly, a witnessed circumstance since 2005. The state of affairs is hardly predictable because despite the dollars instability, Yen is also weakening with china still threatening to revalue its currency. The future of the exchange pattern is still not feasible because Asian economies are declining their willingness to intervene aggressively in foreign market in the search for stable exchange value of the various currencies. As the market turmoil seemed to intimate in 2006, currency crisis in the emerging markets may be experienced. Te situation of exchange rate is not only a current issue, but issues deemed to persist and thus corner the global economy. It therefore requires a sustainability approaches to address both present and future challenges which it may poss (Radetzki, 2003, p. 18). Today’s economy is feeling the impact of the emerging markets, whose economic abilities is determining the health of the world economy. Dismissal of emerging markets took place in 2001, with economic slowdown of G7 and US. Financial crises and outright currency hardly hit Turkey, Brazil, Uruguay and Argentina. In 2006, commodity prices were high, global growth was high and global interest rates were low. The mess to the total progress has come after the encounter of global economy slow down, falling commodity prices, hiking oil prices, G7 short rates going up and thus making financial and economic conditions for emerging market tougher. Their turmoil in 2006 means the economies are vulnerable to financial stress up to early 2010. Both existing and emerging markets are encircled in the same economy, experiencing almost similar challenges but using different survival strategies. It must however be realized that any economic slowdown experienced by any of these entities applies to the rest of the economy. For the sake of sustainability therefore, if the stability of the whole economy has to be tamed, stability of the emerging economies must be put to focus, and thus preserve the global economy at a larger scale (Bonnie, 2003, p. 34). In consideration the present economic characteristics, it would be ignorant act to overlook the state of the equity or earnings market. Following the economic state of the United States and the world economy in general, earnings have sharply slowed down with equity markets underperforming. Based on overoptimistic and excessive expectations of growth, stock market dropped by 9/11 in 2002 when equity markets underperformed. The war that has been going on in Iraq is believed to have led to renewed risk aversion and has frequently slumped the stock market since 2003. When this war reduced shortly in 2003, markets picked up sustained economic recovery strategies accompanied with sharp pick up in earnings and profits. In 2004, 2005 and 2006, stock indexes remained flat regardless of the sharp improvement indicated in corporate balance sheet. It is too difficulty to sustain the growth of earnings, ensure profitability growth that is compatible with the share of GDP and streamline the overall trend of equity markets performance. It is a big dream to the world on how the equity market is expected to perform, its overvaluation based on historically cyclically adjusted P/E ratios. The poor performance of the US economy darkens the future of the equities markets (Howe, 2001, p. 25). In the economic dynamicity, electronic and investment cycle is worth affecting the performance of the world economy. The economy has experienced bust or boom cycle in electronic goods, semi conductors and information technology. The NASDAQ crash in 2004 led to a sharp decline in prices and demand, severely hurting IT firms. When the overinvestment boom which composed of 50% in IT rather than traditional equipment ended, it severely hurt IT exporters such as Malaysia, Hong Kong, Taiwan, Korea, Singapore and Philippines. The extend and depth of the tentative recovery that was started by IT sector in 2004 was too shaky because it could not maintain the demand for IT goods. In 2006, the sector was somehow relieved as the investment turned into a mini investment boom, partially healing Asians economies. This took place because tech goods underwent a pent up demand. Even if the overall poor economic performance may not solely be attached to shopped out consumers, IT strength and impact on global economy is still questionable. World Bank statistics indicate that investments in softwares and equipment have reduced since 2005. This has been the case because corporations do not find profitable real investment opportunities and therefore turning back to their old investment sites. The shake of this sector is also shaking the world economy, meaning that its stability should be sought (Portney, 2006, p. 14). Reference: Bonnie John, 2003. Contemporary economic issues in developing countries. Mahwah, NJ: Praeger, pp. 34. Hansen Alvin, 2004. Economic issues of 2000s. California: American Enterprise Institute; pp. 12. Howe Charles, 2001. Interbasin transfers of water: Economic issues and impacts. California: Resources for the future press; pp. 25. Mullenbach Philip, 2003. Civilian nuclear power: Economic issues and policy formation. London: Twentieth Century Fund; pp. 20.