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America’s Vulnerable Economy Report

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Updated: Sep 8th, 2021

Summary

This article discusses the impact the possible impending recession will have on the U.S. and the world, and if the emerging markets are now strong enough to save the world economy. It starts by saying, while most economists do not forecast a recession in America, economists have been proven wrong time and again. The latest estimates conducted by the magazine show that a recession is not very far off. Even though GDP grew at 3.9% annually in the third quarter of the year, some indicators show that the economy will come to a standstill in the fourth quarter. Consequently, by early 2008, output and employment will be significantly lesser.

The article attributes the main cause of this recession to be the “imploding housing market”. Housing prices have fallen and residential investment has virtually stopped. The low house prices and the subprime credit crunch have combined to make borrowing against capital gains impossible. Consumer confidence has already fallen and this will soon begin to affect consumer spending, which accounts for 70% of GDP.

According to the authors, the only way this recession might not turn into a global economic downturn is if the emerging economies, with an annual growth rate of about 7%, act as “rescuers”. They are in strong shape financially, are independent and most have small budget deficits. Hence, while global growth will decrease due to the recession in America, it will still manage to surpass its 30-year average of 3.5% because of these economies. However, the dynamism of emerging economies spells out bad news for America as it prevents oil prices from falling and weakens an already-weak dollar, and might cause the world to question its need for this currency.

Analysis

The article forecasts a recession which seems more likely with every passing day. The reasons for the contraction in growth outlined in this article, namely the massive spillover from the housing slump, turmoil in financial markets, and higher energy prices, are all valid and point towards a possible recession in the coming months. Job creation has already slowed down and the subprime credit crunch and decline in investment in the housing sector is likely to affect every household in America as the country heads towards a recessionary phase.

The author has also linked the overall slowdown of the U.S. economy with its impact on the global economy and has concluded that in most probability, the emerging economies will be able to save the rest of the world from an economic collapse due to their financial growth and 50% stake in the world’s GDP. The author belongs to the optimistic school of thought which believes that now more than ever, emerging economies are in a very good position to sustain the global downturn and strong enough to respond effectively.

However, the author has failed to incorporate the huge demand which is present in the U.S. and Europe, which is responsible for the dynamism in Asian economies. Asian economies are largely dependent on exports and investment, and the investment in itself is dependent on exports. Hence, if the U.S. is hit by a recession, the consequences might be graver than the ones portrayed in this article since Europe and the U.S. comprise a major chunk of the end-market demand. The article mentions that European economies are also slowing down due to credit issues and this will impact the emerging markets more than this article proposes. Nevertheless, the impact of the U.S. recession will be lesser than in previous times because of the “vigor of the new titans.” Additionally, emerging markets today are more resilient than they have ever been to external shocks and might be able to weather this storm after all. Still, the demand in these economies must grow relative to their output for resources to be effectively utilized. Currently, their exports are outstripping their domestic demand, which is why they are still dependent on the Western economies and this is the challenge they face if the U.S. slips into recession.

The article also discusses the impact of this recession on the dollar which is already in a feeble condition. As central banks of emerging economies will cut down on economic purchases, investors might start questioning why they hold a majority of their wealth in dollars, in the face of the relative weakening of the currency. It does look likely that the times of the dollar as the world’s ‘reserve currency’ are slowly ending. It is expected that the dollar will continue to weaken and if the emerging markets are in strong financial shape, this is exactly what spells trouble for the U.S.

The emerging markets have been outperforming the U.S. in recent times, but whether they can continue to do so when the U.S. is going through rough times, remains to be seen. While the world will be affected by the U.S. recession, this article proposes that the emerging economies will grow fast enough to compensate for the decline in U.S. output. However, it does not mention that most of these economies are export-led, and a huge chunk of demand is American and European, and therefore, the link between the U.S. and the world economy can not be pronounced severed as yet.

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IvyPanda. 2021. "America's Vulnerable Economy." September 8, 2021. https://ivypanda.com/essays/americas-vulnerable-economy/.

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IvyPanda. (2021) 'America's Vulnerable Economy'. 8 September.

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