Recession, House Prices, and Trade Surplus - Assignment Example

Issues & Implication from News-Articles United States: PIMCO: Treasuries reflect likelihood of recession Reuters, published on 19th August 2011 Summary Presently, the decline in United States treasury yields to a 60 year low which is characterized by failing monetary and fiscal policies. The decline in treasury yields is a sure sign of an impending recession. On 18th August 2011, the yield on the benchmark 10yr US Treasury note plunged below the 2 percent mark to settle at 1.98% to dismally rise on 19th to approximately 2.08% (Reuters News 2011). Issues With the rising pressure to pay up debts and running out of monetary and fiscal policy options, the United States, the world biggest economy is on the verge of an economic and financial meltdown which will not only translates to economic stagnation but increase the prices on consumer goods and influence the value of the dollar, which is an international currency. The decline in treasure yields is an illustration of an incoming economic and financial depression and the outcomes of lowering inflation as a means revive an economy. According to Bloomberg News, (2011), the move by the Standard & Poor to cut the US government credit rating to AA+ did not help matters much as it resulted in investors pulling out their stocks seeking liquidity and prefer conventional safe haven assets as echoed by Wall Street Journal, (2011). The decline has generated a significant exit from the risk markets which demonstrate the panic investors have on the possibility of a recession and the increased loss of trust in any policies. According to the Telegraph, the impending recession is as a result of failure of policy makers in the US and in Europe in decisively containing the sovereign crisis The (Telegraph 2011). Implications The US needs to make quick decisive measures to not only protect its own population but also, develop effective fiscal policies to safeguard against potential recession and boost investor confidence. The worrying trend in the US coupled with the turmoil in Europe raises concerns about the future course of global growth weighing down on stocks and assets, which are easily impacted by changes in growth. The panic generated by falling treasury yields has the potential to make consumers refuse to buy or investors to invest, and increased risks in a rise in the level of unemployment, massive corporate losses and stagnant global growth. Market to market hit in China and other Asian countries is expected since countries such China holds 26% of overall US treasury holdings as indicated by (Wall Street Journal 2011). References Reuters News 2011, PIMCO: Treasuries reflect likelihood of recession, Published 19th Aug 2011, http://www.reuters.com/article/2011/08/19/us-pimco-economy-gross-idUSTRE77I56W20110819 The Telegraph 2011, Published 20th Aug 2011, US and euro zone ‘dangerously close to a recession’, http://www.telegraph.co.uk/finance/financialcrisis/8708700/US-and-eurozone-dangerously-close-to-a-recession.html Bloomberg News 2011, Published 18th Aug 2011, U.S. Stocks sink as Treasury Yields Fall, http://www.bloomberg.com/news/2011-08-18/asian-stocks-commodities-decline-on-yen-global-economic-growth-concerns.html Wall Street Journal 2011, Published 8th Aug 2011, Treasury yields drop to lowest since January 2009, http://www.marketwatch.com/story/treasury-yields-inch-up-after-sp-move-2011-08-07?link=MW_latest_news China: China house prices raise fears of more tightening The Telegraph, Published 18th AUG 2011 Summary House prices have been on the rise in China in spite of the rigorous attempts and interventions by the Chinese government to cool the market. The rise in house prices in China put the country, which is the second largest economy at risk of a bursting property bubble. Presently, the rises in home prices have resulted in a rise in consumer inflation in China from 6.4 percent in June in the year to 6.5 percent in July. Issues According to The Telegraph (2011), China’s average prices on new homes have risen from 4. 1 percent in May, 4.2 percent in June, to 4.3 percent in July, this year only with the annual housing inflation in China has risen in more than half of the seventy major cities. In a bid to take control of the spiraling home prices, the Chinese government implemented stringent measures to help cool down the property markets among them increasing its firm home purchase limits to smaller cities BBC News, (2011). It is speculated that the move by the government would have initiated the rise in housing inflation in July as buyers were able to frontload their purchases prior formal imposition of the restrictions. As noted by BBC News, (2011), the soaring cost of property in China is hitting hard on the Middle Class. Implications The Chinese government needs to not only develop curative measures, but implement long term property policies that foster home ownership for the middle class. The rising prices on homes in China are making it difficult for not only the Middle Class but for the young population or graduates to afford homes. With the rising prices on homes and few options of financial products to put in cash for investors in China, it has resulted in buyers investing buying homes and properties speculatively, expecting the prices to go higher, which is risky if the prices were to plummet downwards China. org.cn News (2011). Educational programs on investments is crucial to forming safe and lucrative business decisions when investing References The Telegraph 2011, Published 20th Aug 2011, China house price raises fears of more tightening, http://www.telegraph.co.uk/finance/china-business/8708792/China-house-prices-raise-fears-of-more-tightening.html BBC News 2011, Published 3rd July 2011, High cost of property hits China’s middle class, http://www.bbc.co.uk/news/business-13959239 China. org. cn News 2011, Published 14th July 2011, Current house prices still high for middle class, http://www.china.org.cn/video/2011-07/14/content_22987236.htm Japan: Japan posts surprise trade surplus as exports recover BBC News Published 21st July 2011 Summary Despite the hit the Japanese commercial sector experienced following the 2011 earthquake, tsunami and the nuclear power plant explosions, the country posted a trade surplus of 70.7 billion yens which is equivalent to 898 million US dollars in June 2011 (BBC News 2011). The surplus can be attributed to a recovery in production and the supply chains through shipments. The trade surplus is a relief as it gives hope of a recovery of Japanese economy amidst the challenges of uncertain global economy and a fluctuating yen currency (BBC News 2011). Issues An increase in trade surpluses are a sure sign of recovering exports and production firms in Japan. The trade surpluses not only indicate a gradual step to recovery of production especially in the motor industry and recovery of the supply chains but also, a strengthening yen currency (The Australian 2011). Nevertheless, with the impending recession in US, uncertainties in Europe and a slowdown in China generates difficulty especially with the strengthening Yen as this makes Japanese exports more costly abroad. Be it as it may, the rises in Yen has helped in cutting the cost of imports (BBC News 2011). Implications The strengthening yen generate new equations to the global capital markets, which international investors and global capital market players need to analyze critically. Even though the rise in trade deficits come as a relief and an indicator of the quick recovery of Japanese production plants, the rise in the strength of yen threatens the country’s exporter’s competitiveness relative to their competitors, which might hurt it in the long run as supported by (The Australian 2011). The government therefore, should identify ways to soften the impact of a stronger yen. Moreover, solutions to frequent power shortages and increased reliance on imported energy should be established to enhance industrial outputs and cut on expenses (BBC News 2011). References BBC News 2011, Published 21st July 2011, Japan posts surprise trade surplus as exports recover, http://www.bbc.co.uk/news/business-14229316 The Australian 2011, Published 21st Aug 2011, Japan’s trade surplus surprises, http://www.theaustralian.com.au/business/economics/japans-surplus-surprises/story-e6frg926-1226099057911 BBC News 2011, Published 18th Aug 2011, Japan’s trade surplus widens in July despite export dip, http://www.bbc.co.uk/news/business-14568890 Egypt: What next for Egypt revolution and transition to democracy? BBC News, Published 26th July 2011 Summary Following the January 25th 2011 uprisings in the Arab world, order and economic momentum in Egypt is yet to pick up with more protestors coming back to the Tahrir Square as a form of second revolution to protest on what they perceived as delayed reforms (The New York Times 2011). The battle to transition to democracy is not yet won as emerging fissures indicate that the country is far from achieving democracy and reviving the economic status (BBC News, 2011). Issues Since the transition to democracy after the uprising is not as quick as many would have anticipated, tempers are rising and the economic status of Egypt is at stake. With impending open elections, high budget deficits, liquidity issues, depreciating currency, rising unemployment rates and the absence of a democratically elected leader, Egyptians are hard pressed to develop strategies to alleviate the present economic slowdown. According to (the daily news egyupt.com, 2011), the current hurdles and downgrade hittin the United States owing to its debt crisis is nothing compared economic, political and financial turmoil Egypt is experiencing. Egypt is tasked in reviving its domestic demand, counteracting the impact on its exports, controlling the inflation rate and strengthening its tourism sector (The New York Times 2011). Implications Political stability is an essential element that countries experiencing revolts such as Egypt needs in order to not only revive the economy but also ensure the social needs of its population are met effectively and efficiently. Failure to realize the anticipated goals from the uprisings threatens to initiate new revolts which are more likely to cripple the Egyptian economy. The challenge for Egypt is not the impact of the US or global crisis, but developing sustainable frameworks for the economy to recover and therefore, use its homogeneity to counter impact of a global downturn (the daily news egyupt.com, 2011). Additional uprisings are a threat to economic stability and commercial stability in the Arab world, which translates to high oil prices globally, which initiates rise in transport cost, power generation costs and overall rise in the cost of living for all global economies relying on oil to function. References BBC News, Published 26th July 2011, what next for Egypt revolution and transition to democracy? http://www.bbc.co.uk/news/world-us-canada-14296684 The New York Times 2011, Published 20th Aug 2011, Egypt News- Revolution and Aftermath, http://topics.nytimes.com/top/news/international/countriesandterritories/egypt/index.html The dailynewsegypt.com 2011, Published 20th Aug 2011, US ripple effect small compared to Egypt’s economic woes, http://thedailynewsegypt.com/economy/us-ripple-effect-small-compared-to-egypts-economic-woes.html Dubai: Chinese playing key role in Dubai recovery Arabian Business News 2011, Published 20th Aug 2011 Summary Dubai being a major real estate market was among the hardest hit by the 2009 global downturn with majority of its projects stalling and property prices plunging to lows of up to 60% (Arabian Business News 2011). China as the second largest economy is giving a helping hand by investing in the sector with the intention to not only help Dubai to recover but also, to enter new markets such as Africa. According to (Big Projectme.Com 2011), the recovery in Dubai’s real estate indicates a recovery in property values in Middle East. Issues With the hopes of recovery in Dubai’s real estate sector, it raises the hopes of investors in Dubai’s ability to repay her debts without selling off her assets. The recovery has been facilitated by massive borrowing with Investment Corporation of Dubai refinancing a $2.8 billion of the $4bn tranche of its $6bn loan (Financial Times 2011). However, Dubai should be keen by implementing policy reforms to safeguard the rate of its debt to GDP rising. Implications To prevent future property crisis in the Middle Eastern region, innovative business strategies are needed to ensure the real estate economy is not only stable but it can adequately withstand another recession especially now that talks on a probable downturn is rife. Failure to develop and implement policy reforms threatens to increase Dubai’s debt to GDP. The challenge lies in Dubai repaying her loans without selling off her assets. References Arabian Business News 2011, Published 20th Aug 2011, Chinese playing key role in Dubai recovery, http://www.arabianbusiness.com/chinese-playing-key-role-in-dubai-recovery-416466.html Big Projectme. Com 2011, Dubai real estate boosted by Kuwaiti Investments, http://www.thebigprojectme.com/2011/08/09/dubai-real-estate-boosted-by-kuwaiti-investments/ Financial Times 2011, Published 20th Aug 2011, loan deal highlights Dubai recovery hopes, http://www.ft.com/intl/cms/s/0/60f63022-905c-11e0-9227-00144feab49a.html#axzz1VZC18mPn Read More