*This article was featured in the January edition of the finace Magazine-Infineeti- of Indian Institute of Foreign Trade.*
2011 beckons us... But before we think of the way forward let us reflect on what happened to the markets in 2010. It was the year which hogged limelight in many ways... some pleasant while some shocking.
"Adjustment[/i]" was the buzzword for major economies in the year gone by, with the United States struggling to overcome its economic flaws accumulated over the years, Europe fighting two debt crises, and emerging economies trying to fend off potential inflation risks. Since mid-2010 the world economic growth obviously slowed down.
It was all a mixed bag, on one day people raised a toast to the recovery, to the weathering away of recession, while on the other they lamented foreclosures, bailouts, inflation and unemployment. The whole year heavy weight words like double dip recession, the “new normal”, deflationary spiral, quantitative easing were thrown at the commoners.
2010 was the year of unexpected, just when it looked as if the financial crisis might be subsiding, new ones erupted across the European Union (along with an Icelandic volcano) that threatened to topple the EU's common currency, the euro. Ireland was the first country to buckle, followed shortly thereafter by Greece. Now, what started as a major fiscal problem of Greece not only morphed into an European problem but also became a global problem. Soon the troubled and heavily-indebted countries of Europe were referred by the acronym PIGS – Portugal, Ireland, Greece and Spain.
The problems in the PIGS led to the euro being battered and some even started to fear the break-up of the euro zone. But the European Union agreed a deal to rescue Greece – and also the other wrecked economies. In return of the bailout package from the stronger counterparts such as France and Germany, strict austerity measures were demanded from the PIGS[/i][/b].
It wasn’t just Europe, the USA too spend dollars left, right and centre. The Fed decided to take more draconian measures, one of which was Quantitative Easing(QE) ,[/i][/b] flooding the economy with money.[/b][/i]The U.S. government agencies committed or spent trillions of dollars in loans, asset purchases, guarantees, and direct spending. This all Bernanke did to avoid US falling into the reigns of deflation. Fed policies served the U.S. domestic economic targets, but since the U.S. dollar is an international trade and reserve currency, and international capital flows across borders, the Fed QE cannot balance its domestic and international impacts, and thus imposed a global systematic risk.
There was a point in the year when there was increased speculation on [/i]China's yuan being 'set to usurp US dollar' as world's reserve currency[/i], backed by China’s large current account surplus, focused government and few of the economic worries that US faces. But this would have necessitated free movement in Yuan’s exchange rate, to which of course the Central Bank of China was unwilling to bow down on. So the Dollar continues to retain its status of being the Global currency despite its instability.
[/b]Thus while the economic stimulus implemented by developed economies may have prevented the worsening of the financial crisis and serious recessions, but structural problems[/i] won't disappear in a short run. Given the bumpy recovery process and daunting policy challenges posed to major economies, growth prospect for 2011 is hardly optimistic. Today’s raging bull market may morph into tomorrow’s angry bear. Forecasts of inflation and deflation can be found on the same page.
Investors’ forecast for 2011 as “sunny with a chance of overheating”.[/i][/b]
[/i][/b]
This was the news on the developed world, but the highlight of 2010 remained the Developing nations. The emerging economies saw a robust rebound backed on substantial macroeconomic stimulus, and a faster-than-expected turnaround in capital flows. The center of world economic power shifted from G7 to developing countries. As per the International Monetary Fund (IMF) the emerging and developing economies had a 7.1% growth in 2010, with China at 10.5 %, India at 9.7%, Brazil at 7.5%, and Russia at 4%.
If on one hand China’s Yuan made to the headlines... India was no behind. Though 2010 was mired with scams and controversies at the domestic front, but internationally India emerged as a powerful player in Asia. Heightened interest of business was shown in India. Obama with a contingent of 200 American CEOs made a beeline for India, eyeing the [/b]many Indian sectors, which are otherwise closed but carry the potential of billions of dollars. Obama’s visit was fairly successful, with deals worth more than $10 billion being signed in a matter of 3 days [/b]and deals valued much more being soon to follow.
Thus 2010 in many ways was a landmark year, it just changed the face of the globe, tilted the financial powers from West to the East.
Closing Thoughts...[/i][/b]
However, the recent acceleration in growth is likely to peter out unless there is a recovery in advanced economies in the current year 2011. Thus the emerging economies recovery of 2010 alone is not the solution, there is the need for the developed economies to follow suit only then the growth in these developing nations can be sustained, otherwise there is an increased possibility of a double dip recession [/i]riding on the false prosperity of the developing countries. [/i][/b]
2011 beckons us... But before we think of the way forward let us reflect on what happened to the markets in 2010. It was the year which hogged limelight in many ways... some pleasant while some shocking.
"Adjustment[/i]" was the buzzword for major economies in the year gone by, with the United States struggling to overcome its economic flaws accumulated over the years, Europe fighting two debt crises, and emerging economies trying to fend off potential inflation risks. Since mid-2010 the world economic growth obviously slowed down.
It was all a mixed bag, on one day people raised a toast to the recovery, to the weathering away of recession, while on the other they lamented foreclosures, bailouts, inflation and unemployment. The whole year heavy weight words like double dip recession, the “new normal”, deflationary spiral, quantitative easing were thrown at the commoners.
2010 was the year of unexpected, just when it looked as if the financial crisis might be subsiding, new ones erupted across the European Union (along with an Icelandic volcano) that threatened to topple the EU's common currency, the euro. Ireland was the first country to buckle, followed shortly thereafter by Greece. Now, what started as a major fiscal problem of Greece not only morphed into an European problem but also became a global problem. Soon the troubled and heavily-indebted countries of Europe were referred by the acronym PIGS – Portugal, Ireland, Greece and Spain.
The problems in the PIGS led to the euro being battered and some even started to fear the break-up of the euro zone. But the European Union agreed a deal to rescue Greece – and also the other wrecked economies. In return of the bailout package from the stronger counterparts such as France and Germany, strict austerity measures were demanded from the PIGS[/i][/b].
It wasn’t just Europe, the USA too spend dollars left, right and centre. The Fed decided to take more draconian measures, one of which was Quantitative Easing(QE) ,[/i][/b] flooding the economy with money.[/b][/i]The U.S. government agencies committed or spent trillions of dollars in loans, asset purchases, guarantees, and direct spending. This all Bernanke did to avoid US falling into the reigns of deflation. Fed policies served the U.S. domestic economic targets, but since the U.S. dollar is an international trade and reserve currency, and international capital flows across borders, the Fed QE cannot balance its domestic and international impacts, and thus imposed a global systematic risk.
There was a point in the year when there was increased speculation on [/i]China's yuan being 'set to usurp US dollar' as world's reserve currency[/i], backed by China’s large current account surplus, focused government and few of the economic worries that US faces. But this would have necessitated free movement in Yuan’s exchange rate, to which of course the Central Bank of China was unwilling to bow down on. So the Dollar continues to retain its status of being the Global currency despite its instability.
[/b]Thus while the economic stimulus implemented by developed economies may have prevented the worsening of the financial crisis and serious recessions, but structural problems[/i] won't disappear in a short run. Given the bumpy recovery process and daunting policy challenges posed to major economies, growth prospect for 2011 is hardly optimistic. Today’s raging bull market may morph into tomorrow’s angry bear. Forecasts of inflation and deflation can be found on the same page.
Investors’ forecast for 2011 as “sunny with a chance of overheating”.[/i][/b]
[/i][/b]
This was the news on the developed world, but the highlight of 2010 remained the Developing nations. The emerging economies saw a robust rebound backed on substantial macroeconomic stimulus, and a faster-than-expected turnaround in capital flows. The center of world economic power shifted from G7 to developing countries. As per the International Monetary Fund (IMF) the emerging and developing economies had a 7.1% growth in 2010, with China at 10.5 %, India at 9.7%, Brazil at 7.5%, and Russia at 4%.
If on one hand China’s Yuan made to the headlines... India was no behind. Though 2010 was mired with scams and controversies at the domestic front, but internationally India emerged as a powerful player in Asia. Heightened interest of business was shown in India. Obama with a contingent of 200 American CEOs made a beeline for India, eyeing the [/b]many Indian sectors, which are otherwise closed but carry the potential of billions of dollars. Obama’s visit was fairly successful, with deals worth more than $10 billion being signed in a matter of 3 days [/b]and deals valued much more being soon to follow.
Thus 2010 in many ways was a landmark year, it just changed the face of the globe, tilted the financial powers from West to the East.
Closing Thoughts...[/i][/b]
However, the recent acceleration in growth is likely to peter out unless there is a recovery in advanced economies in the current year 2011. Thus the emerging economies recovery of 2010 alone is not the solution, there is the need for the developed economies to follow suit only then the growth in these developing nations can be sustained, otherwise there is an increased possibility of a double dip recession [/i]riding on the false prosperity of the developing countries. [/i][/b]