US Economy Will Affect World Economy
Despite the obvious problems in world financial markets, many politicians in Washington feel that everyone should just ‘take a deep breath’ and all will be well for the economy.
Evidence is starting to stack up against that view. What started as local sub-prime difficulties in Florida, California and southern US states are becoming a serious economic problem.
The rate of unemployment in the US is rising for the first time in four years. The Democrats would like to think that this might be the beginning of George W Bush’s recession. George Bush senior failed to recognise the signs in 1992, and Bill Clinton was swept to power as a result. Presidential elections are looming in 2008.
The main problem area in the US is its housing market. In July 180,000 homes were repossessed, a triggering rising of 93% on a year earlier. Single-occupancy home sales were down by 22.3% for the same dates, and US estate agents say they are holding enough stock for over nine months of regular buying. Housing market disruption is said to be at its worst for two decades. That in turn has a direct effect on US output and jobs. The housing boom has created many thousands of jobs – for immigrants on building sites, for estate agents, mortgage brokers, architects, lawyers. In addition to these professions, of course, are the jobs at investment bankers who package the home loans in order to sell them on to investment funds. Figures suggest that in the four years to April 2005, the housing industry helped create 800,000 jobs – up to 40% of new jobs across the country. However, where once there was a boom, now jobs in the market are disappearing all too rapidly. Already 120,000 have gone and more continue to fall. The knock-on effects are huge: home sales trigger spending on household appliances, kitchens, furniture but giants in the these markets, Home Depot and Sears are seeing their sales plummet.
In the States much expenditure has financed by ‘home equity loans’, which are basically second mortgages that allow people to withdraw equity from their home to use for spending. Problems follow if the value of the houses start to fall. Individual spending power is then hit and the economy suffers.
It’s not just the American economy that suffers, because the economy in the States accounts for 30% of world gross domestic product, and consumers represent an amazing 70% of the GDP in the US. That means that US consumers are responsible for 21% of total spending across the globe. China, by contrast, accounts for less than 7%.
Maybe emerging economies such as those of Asia, Latin America and Russia will be strong enough to pick up the economic baton if the US shows any more signs of a slowdown, but it may not be that straightforward. The consumer is still king in the US (the figures show quite amply why this is), and stateside folk are still relying on Federal Reserve Chairman Ben Bernanke to stem the tide. Expectations are for a US interest rate cut by 0.25% to 5.5% on 18 September, followed by others as we go to the end of the year.
Whatever action he takes, the housing seems to be in meltdown, credit markets are blocked and Wall Street is running scared, so the chances of avoiding a downturn and surging unemployment now look remote.
Dire consequences for the UK are almost inevitable as we rely so greatly on the US economy. In the meantime with Northern Rock in crisis, the UK has problems of its own to deal with.
Published on September 23, 2007
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