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What is happening with the economy?

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Message Abbas Bakhtiar

The case for the European Union is straight forward. A flight from dollar to Euro makes the EU’s export much more expensive, just when one of its biggest trading partners “US” goes into recession. European Union will also feel the pains of financial crisis of the US. Many EU financial institutions had invested in US and now they will have to accept the losses. So we will see a down ward trend in Europe, but not as severe as the one in US. In addition European Central Bank has still a lot of room for manoeuvre. It can reduce interest rates substantially. EU also has smaller total deficit than US. Most importantly, most of the EU countries have solid social security nets in place which will dampen the effects on their citizens.

China on the other hand lacks this social security net, but has large foreign reserves. Most of this reserve has been the result of its exports. Last year its trade surplus with US was over $200 billion. This surplus will diminish substantially over the coming year, unless of course the US continues to spend the money that it doesn’t have. But in general, a recession in US and a slowing economy in EU will impact China negatively. Its exports will decline and its unemployment will increase, something that the Chinese government is very sensitive to. China suffers from double digit unemployment rate, something that the Chinese government is reluctant to discuss openly. For example in 2004 the RAND estimated the actual Chinese unemployment to be 23%. Things haven’t improved that much since then. Even if the unemployment rate was down to 15%, it still presents a very large number.

So China will most likely embark on large infrastructure projects to keep unemployment levels stable. The government will also try to improve its social security programs and pay more attention to the interior of the country, where the benefits of double digit growth has not reached yet. The economic growth will also be reduced to single digits, relieving some pressure off the oil prices.

India will fare worse than China simply because its population growth is higher than China while it lacks the Chinese reserves and resources. According to the Indian government forecast, India needs to create 10 million new jobs per year to keep its unemployment rate steady. But others put that figure at 15 million. An Indian national report on employment situation has warned that nearly 30% of the country’s 716 million-strong workforce will be without jobs by 2020. This of course is a conservative estimate based on continued solid economic growth; something that, at least with the current economic outlook, is highly unlikely.

Stock-market: The Near Term-outlook

The outlook as you have guessed is not good. I have been waiting for this crash since mid 2006 and what kept it from happening was what Greenspan called the “irrational exuberance” of the investors. The market, especially the US markets, will plunge further. I see Dow Jones below 11500 and Nasdaq at 1900. The full picture of financial crisis is still hidden and full cost of the coming bailouts will not be known till autumn.

Of course this is not written in stone. The US government may come to its senses and decides to act responsibly and allow many companies and banks to go under. It may try to support dollar. It may try to cut the budget deficit or the trade deficit. It may even decide that its war in Iraq was not and is not such a good idea and withdraw its troops. It may even try to get friendly with Venezuela and Iran, thereby reduce both the price of oil and pressure on the dollar. The truth is that it is the US president that can do these things and not the Federal Reserves. We just have to wait for the elections and see who is elected as the next president.

It is my opinion that no other US president has ever damaged United States as much as George Bush, and he will be remembered by both the Americans and others as one of the most unpopular US presidents ever. But he is at the end of his second term and has only a year to destroy the rest of the economy. Let us hope that he will be busy with other things and doesn’t do more damage. Let us also hope that the American people will not fall for promises of further tax cuts and glories in battle fields abroad. Neither brings peace and prosperity.

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Dr. Abbas Bakhtiar lives in Norway. He works as a management consultant.He is also a contributing writer for many online journals.
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