What do the domino effect and global economics have in common?
In the same manner that one Communist nation can politically affect a neighboring government, an economic expansion or contraction in one country can affect the prosperity of another. Economies around the world are so intertwined that you must look at the world as a whole to explain the situation in the United States.
In 2007, the United States entered into a recession that marked the largest economic downturn since the Great Depression. And when the largest economy in the world went down, so did everyone else.
“The deregulation of financial capital on a global scale brought us the 2007-2010 global financial crisis, the crises in Greece, Spain, Portugal and Iceland,” said John K. Voehringer Jr. Professor of Economics Robert Williams in an email interview.
Outside of the United States, economic growth has been slow and shaky. Although the major economies are gaining momentum in their recovery from the recession, smaller countries are struggling to make any growth.
Low oil prices and shrinking demand for mining and coal have put great stress on developing countries entering 2016. According to the World Bank’s 2016 Global Economic Prospects report, global investors pulled out $52 billion in emerging market equity funds in the third quarter of 2015.
But lower oil prices have had repercussions elsewhere, including the United States.
“The debt deflation crisis in oil and other basic commodities is now playing havoc in international financial markets and complicating the conduct of monetary policy in the U.S., Japan, Europe and elsewhere,” said Williams.
The sudden economic stumble in China has further complicated global monetary policy. With lower-than-predicted growth in China for 2015, concerns were raised that the United States would not export goods at a strong level.
“In general, the economic slowdown in China can be related to decreased global demand for manufactures,” said junior Spanish and economics major Thomas Driscoll in an email interview. “China is a major exporter of manufactured goods; this is the reason for the large growth that has occurred in the recent years.”
And as the world has become more dependent on China’s high levels of production, their sky-high economic development rates have come crashing back down to Earth.
“China’s economy is growing, but the value of their currency has been reduced to so little that it is hurting them and everyone who trades with them on the foreign exchange markets,” said junior economics major Jake Hymowitz. “Almost every country has connections with China, so their crash was an international crisis that weighed in on our domestic policies.”
Although it took longer for their recovery to begin, the European Union is reporting stronger economic growth in 2016. Due in part to lower unemployment rates and greater consumer spending, European economic growth is forecasted around 1.5 percent.
To keep their economy running forwards, the EU introduced quantitative easing in 2015, a process of buying large amounts of government bonds in order to reduce interest rates. With consumers earning and spending the most since the recession, Europe is looking towards expansion.
However, the European recovery is not a balanced one. According to Eurostat, a statistics collection agency in the EU, Germany experienced an unemployment rate of 4.5 percent in the fourth quarter of 2015 while Spain saw 21 percent.
Leading the international economic growth among developed countries is the United States. However, uncertain foreign conditions have slowed the recovery.
“It’s very hard to tell exactly what’s going to happen in the U.S. because we have not had the recovery we wanted since the recession,” said Hymowitz. “The unemployment rate is down to 4.9 percent, which is excellent, but we are failing to meet the inflation rate of 2 percent.”
The driving factor in the slower-than-expected growth in the United States is the appreciation of the dollar. Because the dollar has become more valuable in comparison to other currencies, buying American goods in international markets is more expensive.
By most measurements, 2016 will be a year of modest economic expansion. But uncertainty remains in both the United States and abroad. Depending on the policies of the central banks and the behaviors of international markets, economies around the world can take a step forward or backward.
It is going to be an interesting year.
