Japan earthquake hits global growth

The earthquake in Japan has been a large drag on global growth in the June quarter, according to Export Finance and Insurance Corporation (EFIC) chief economist Roger Donnelly.

In its latest EFIC newsletter, Donnelly also notes the affect of the global economy on the “Arab Spring” through rising food and energy prices.

“Growth looks as if it could fall to its lowest rate since the recovery began in the September quarter of 2008,” says Donnelly.

What next?

“Fortunately, the world economy now seems to be accelerating as the drags from Japan and commodity price rises dissipate,” says Donnelly.

“So the September quarter could be quite a buoyant one. That’s the good news. The bad news is, by the standards of past global recoveries, this one is particularly sluggish, with OECD GDP still at levels below the pre-crisis peak.”

Donnelly says the financial crisis in Greece continues to send global shockwaves.

“Athens is in talks with ‘the troika’ – the European Commission, the European Central Bank and the IMF – for more emergency funds to stave off a default, says Donnelly. “Meanwhile, the markets are pricing in a larger and larger risk of default, demanding for instance a yield of 28 per cent on two-year government bonds, he says.

“The troika has little choice but to extend more funds, because the alternative of allowing a default would cause the Eurozone debt crisis to escalate alarmingly. But this won’t tackle the underlying problems of fiscal insolvency in Peripheral Europe, nor the corresponding problem of inadequate capital buffers in European banks. Until these underlying problems are tackled, the debt crisis will continue to smoulder.”

Apart from Greece, the media spotlight is also on the US, as Congress continues to wrangle over whether to raise the federal government’s statutory debt limit.

“If it fails to do so by August 2, Uncle Sam could risk a technical default,” remarks Donnelly.

“Fortunately, it won’t come to that. The bond market certainly doesn’t think so: yields on US Treasury securities continue to fall, strongly suggesting that the market is more concerned about a faltering economic recovery than about technical default.”

“The chatter about ‘technical’ default is a bit of a distraction’, says Donnelly. “Which doesn’t mean that the government doesn’t have fiscal issues. It will certainly have to go about balancing its budget once economic recovery is more firmly entrenched.”

The newsletter also looks at:

  • How Egypt’s economy is tracking following the overthrow of Mubarak
  • The forthcoming general election in Thailand
  • Policies of the new president-elect in Peru, Ollanta Humala.

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