Elephants in room for stock market

Elephants in room for stock market
14 August 2012

GLOBAL stock markets have been relatively uneventful of late, but could this be the calm before the storm?

European sovereign debt issues, the increasing possibility of a hard landing in China and the struggling US economy are the three elephants in the room.

cashy takes a closer look...

‘Fiscal cliff’ for US

The US is another month closer to the so-called ‘fiscal cliff’ looming at the beginning of next year.

US lawmakers have a choice: they can either let current policy come into effect at the beginning of 2013 – this features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – or they can cancel some or all of the scheduled tax increases and spending cuts.

This would add to the deficit and increase the odds that the US could face a crisis similar to that which is happening in Europe. The most likely result is another set of stopgap measures that would delay a more permanent policy change until 2013 or later.

The US presidential election will almost certainly have an impact on the direction of future policy, particularly if one party earns a decisive victory.

However, the effect on the economy could be dramatic. A Wall Street Journal article from May estimates that $280 billion would be pulled out of the economy by the sun setting on the Bush tax cuts; $125 million from the expiration of the Obama payroll-tax holiday; $40m from the expiration of emergency unemployment benefits; and $98bn from Budget Control Act spending cuts.

In all, the tax increases and spending cuts make up about 3.5% of gross domestic product, with the Bush tax cuts making up about half of that, according to a JP Morgan report.

Amid an already fragile recovery and rising unemployment, the economy is not in a position to withstand this type of shock.

Hard landing for China?

Will there be a hard landing for China? Economists describe a hard landing as a severe slowdown or even contraction into recession of a country’s GDP, following a period of rapid growth. The cause is often a government’s attempts to control inflation by tightening the money supply.

Although still a developing nation, the People’s Republic of China has emerged as the world’s second largest economy, following decades of rapid growth driven by exports and fuelled by investments worth hundreds of billions of dollars in infrastructure and manufacturing capacity.

To maintain a high pace of expansion for a country of its size, China is now attempting to engineer slower but more sustainable and better quality growth, while attempting to improve domestic consumption to make up for weaker overseas demand for locally-produced goods.

Europe in turmoil

Europe remains in turmoil. European policymakers, who already lack unity, face a difficult choice: keep the currency union together, with all of the challenges that would entail, or allow Greece (and possibly Spain and/or Italy) to exit – a path that would likely lead to financial market chaos.

As a result, the chance of a further economic shock to the region, and the world economy as a whole, is still a significant possibility, and will likely remain so for several years.

Stock market investors, what's worrying you just now? Tell us by commenting below...

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Independent Financial Advisor
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