Confidence among businesses and consumers has declined due to the impacts of public debts in the Eurozone and the downturn of the US economy. The prospects for the global economy have become far bleaker than ever before, prompting forecasts about the possibility of a global growth slump.

The involvement of Spain and Italy in Europe’s public debt issue is increasing the risk of the collapse of the euro. Furthermore, though the speed of the US economic recovery was better in the third quarter (2.5 per cent), political tension between the two parties on the issue of raising the debt ceiling are still adversely affecting retail, investment, employment and production.

All of these could create a downward spiral, in which lack of confidence in investing will continue to further weaken employment and consumption, pushing developed countries back into recession. Even if Europe can avoid disaster, the prospects for the global economy will be daunting as rich countries tighten the financial reins and leading emerging economies like the BRICS (Brazil, Russia, India and China) provide less cushioning for global growth.

A striking example was seen in October, when steel customers, fearing a stagnating global economy, rushed to delay orders, causing companies to lower their prices. The world steel industry faces a difficult period. Crude oil prices in October surged 18 per cent compared with September.

In contrast, the forward price of petroleum on the international market at the end of October was approximately the same as at the end of September. The IMF has identified the centre of instability as lying in two giants of the global economy: Europe and the US. The US economy is growing slowly as a fall in confidence among consumers in the summer reveals further weaker spending in the future.

The US is in a tight fiscal period more serious than that of any other large economy, as temporary cuts in taxes and unemployment insurance expire at the end of the year. October saw no stimulus, except that interest rates still stood as low as 0.25 per cent. Another tough issue is high unemployment, though this recently declined to 8.6 per cent in November from 9 per cent in October. The US is also in a state of excessive spending and the budget deficit for 2011 is likely to exceed $1.3 trillion.

Spending by Americans helped the country’s economy reach its expected growth rate in the third quarter (up 2.5 per cent over the same period last year, as announced in October). Overall, however, US consumers still show concern about the economic future, with the consumer confidence index in October falling from 45.2 in September to 39.8 in October – the lowest since March 2009, according to the Conference Board.

Moreover, on November 20 The Economic Intelligence Unit (EIU) lowered its forecast for US growth in 2012 to 1.3 per cent compared to the September forecast of 2 per cent, mainly because of the worsening situation in the Eurozone. The EIU claimed the US economy has slowed in the past year.

Eurozone tipping into deep recession

A number of recent figures have shown this. The IMF estimates the damage to European banks since the start of the public debt crisis in 2010 has climbed to €200 billion ($273 billion) and more than this figure is now needed for the banking system to recover.

Worse, given the sudden collapse of MF Global due to its large holding of European bonds, some observers predict that a similar bank crisis of major proportions like the past one in 2008 causing the collapse of Lehman Brothers might happen again, and this time it might be the turn of Goldman Sachs and Morgan Stanley.

Current figures from European countries

In a report published on November 6, France’s statistics institute (INSEE) lowered its forecast for the country’s economic growth in 2011 from 2.3 per cent to 1.7 per cent. Unemployment in the fourth quarter is forecast to reach 9.2 per cent, against the second quarter’s 9.1 per cent.

The Bank of England injected a further £75 billion pounds ($115 billion) in attempt to lift the economy. As such, the total amount of money the central bank has injected into the economy amounts to 275 billion pounds (over $410 billion). The Bank of England also decided to keep interest rates at a record low level of 0.5 per cent.

According to the central bank, Britain’s economic recovery is being threatened by a pause in the global economy and the severity of the EU’s public debt. Spain and Italy’s credit ratings were downgraded. This continues to be another difficulty for EU countries.

On October 28, Italy’s borrowing costs soared to a record level, even after European leaders reached new agreements on controlling the public debt crisis. Italy sold 10-year bonds with an interest rate of 6.06 per cent, the highest since the euro was adopted in 1999.

On October 31, Eurostat said unemployment in the Eurozone continues to march upwards, from 10.1 per cent in August to 10.2 per cent in September. This is the highest rate since June 2010 and the fifth successive month of over 10 per cent. Spain has the highest unemployment rate - 22.6 per cent, as tightening/austerity measures from the government weakened the growth of the fourth largest country in the zone. Unemployment in Italy is 8.3 per cent, while Austria and the Netherlands have the lowest rates – 3.9 per cent and 4.5 per cent, respectively.

Greece has announced budget projections for the 2011 fiscal year, with a budget deficit of 8.5 per cent, well above the target of 7.6 per cent the country committed to in the bailout programme.
Europe, the US and the world are expecting Greece to overcome its public debt crisis because in case of default the oil spill will sink Europe and probably lead the US and the world into another financial crisis.

According to the latest agreement approved by EU finance ministers, European banks will be forced to raise €108 billion ($150 billion) in capital within six to nine months to help reinforce the banking system. The chief executive of the newly established European Financial Stability Facility (EFSF) has tried to convince China to help rescue countries facing a debt crisis in Europe, but China is increasingly showing its lukewarm attitude.

For Europe, the public debt crisis in the Eurozone has had implications for all issues. The increasing risk of collapse of the euro, as well as friction among the 17 members in the area on how to save the common currency has dragged down confidence among businesses and consumers.

The EIU, therefore, has lowered its GDP forecast to 0.3 per cent in 2012 compared to the previous 0.8 per cent. The EIU noted that if the crisis was to be stopped, growth could recover in 2013, albeit feebly. Unstable economies in the US and the EU, coupled with the floods in Asia Pacific, have slowed down economic growth in ASEAN countries.

Some countries in the ASEAN have been forced to lower their economic growth targets for 2011 and 2012. The IMF has cut its Asia growth forecast to 6.3 per cent and 6.7 per cent in 2011 and 2012, respectively, lower than the 6.8 and 6.9 per cent forecasts it made in April.

Economic growth in Asia

Singapore – which is greatly dependent upon exports – reported growth of 1.3 per cent in the third quarter. To stop the downturn in the economy, the Singaporean government has loosened monetary policy for the first time since April 2009.

The central bank of Thailand has lowered its growth forecast this year to 3 per cent, compared with its previous forecast of 4.1 per cent. The Philippines government also announced it had lowered 2011 and 2012 growth forecasts from 6 per cent and 5.5–6.5 per cent, respectively, to 4.5–5.5 per cent and 5–6 per cent.

Cambodia’s Ministry of Finance lowered its forecast from 7 per cent to 6 per cent.
The Bureau of Singapore International Enterprises also lowered its economic growth forecast for this year, from 8–10 per cent to 6–7 per cent. According to an IMF forecast, economic growth in Indonesia this year may fall from 6.5 per cent to 6.3 per cent.

With deceleration in the third quarter of 2011, China’s economy once again disappointed investors. China’s National Bureau of Statistics announced on November 18 that the country’s GDP in the third quarter rose 9.1 per cent over the same period last year.

This is the slowest pace since the third quarter of 2009, and is a result of the tight monetary policy implemented by the government and a fall in export turnover resulting from shrinking import demand in the Eurozone.

China’s policymakers are said to be “stuck” with high inflation making it difficult for Beijing to consider stimulating growth. With the Government in the middle of an attempt to resolve the above problems, two new issues have arisen: weakness in export growth resulting from the Euro crisis, and the bankruptcy of small enterprises.

According to the EIU, although China’s economic growth is slow it is still impressive, at 8.2 per cent, if its leaders can prevent inflation and the crash of the real estate market. There are many signs indicating that Japan is recovering better. Its economy continued its recovery in the second half of 2011, and if this trend is maintained in 2012, the north Asian country may see GDP growth of 2.3 per cent according to the EIU.

In September, its core consumer price index (CPI) – minus food – rose 0.2 per cent over the same period in 2010, due to soaring energy costs. This is the third successive month Japan’s CPI has increased, which is evidence of downward deflation. It is noticeable that gas prices rose 10.3 per cent and oil prices 17.4 per cent in December, while the electricity price rose 3.9 per cent.

Another positive sign of Japan’s economic recovery is its unemployment rate, which fell to 4.3 per cent in September. Industrial production value in September decreased 4 per cent compared with August, but it is expected that this phenomenon will not be prolonged. Thailand is suffering from the consequences of its floods and the paralysis has crossed the country’s borders.

Moody’s estimates total damage from Thailand’s floods at US$6.6 billion, or 2 per cent of that country’s GDP. The country’s food manufacturing industry – ‘the kitchen of the world’ – has been severely damaged. Thailand’s agriculture, and its status as the world’s leading rice exporter, was threatened by 12.5 per cent of its farmland being under water.

Tourism, another backbone of the economy, was washed away, with the US and Japan warning their citizens against visiting the country in November. Floods had “severe and widespread” effects on Thailand economy, especially in tourism, industry and agriculture. The country’s central bank has lowered its 2011 growth forecast from 4.1 per cent to 2.6 per cent.

Impacts on Vietnam’s market and economy

The above changes - notably the European debt crisis, of course - have major effects on Vietnam’s financial markets. The poor financial positions of investors will certainly limit foreign direct investment and foreign indirect investment inflows into the country.

In addition, the continuous difficulties in the banking sector – bad credit and low liquidity due to the bankruptcy of several real estate companies – have made many investors re-think their investment decisions. Banking reform is therefore more necessary than ever. The State Bank in particular should make assertive decisions to cease the operations of the black credit and foreign exchange markets.

However, during these hard times there will also be many opportunities for Vietnam’s exports. As during the crisis in 2008, Asian and European markets will choose cheaper goods from countries like Vietnam.

A rice procurement policy at a higher price (25–30 per cent) and the adverse effects of the floods in Thailand will greatly benefit Vietnam’s rice and other agricultural products. It is now essential to have reasonable stimulus and purchasing policies.

Source: VIR