The world economy

I recently finished watching the season 4 of Prison break and cannot help but think of the current market situation in the words of T-Bags' famous lines "The captivity of negativity". Although the economic indicators are not promising, the market conditions have been made all the more bearish, by the whole environment of negativity created by the investment banks and disseminated by the print media. Both Bank of America Merrill Lynch and JP Morgan fanned fears by warning there was a two-in-five chance that the US would fall into another slump. Amidst the current situation of panic and distress, investments are fleeing out of the market, pulling the world economy into a shambles. 

European Central Bank, Frankfurt

La Défense, Paris

a. France dips to 0% growth rate.

Amidst the sexual-assault charges against the French IMF chief, Dominique Strauss-Kahn which does seem to die out, France awaits more crisis in the economic sphere. With the recent release of second quarter statistics by the National Institute for Statistics and Economic Studies (INSEE), economic growth fell to 0% dashing expectations of a modest expansion, as consumers sharply cut spending. This makes the French government plans to cut the budget deficit even more difficult. The data fueled concerns that France, a key player in supporting euro countries in bailout programs, might struggle to meet its deficit targets. In this scenario, while the text book suggests two remedial measures a. raising taxes and b. cutting government expenditures, these are all more unlikely keeping in view the presidential elections in May 2012.  

b. Economic powerhouse of Germany moving into slowdown. Germany cuts deficit faster than expected

German GDP growth jumped to 5.5%, at an annualized rate, in the first quarter, and some softening was widely anticipated last quarter. But a report last week showing just 0.5% growth, at an annualized rate, raised concerns that, like other industrial economies, Germany faces a lengthy stagnation if the global economy doesn't find its footing quickly. Earlier this year, Germany showed a strong recovery and decades-low unemployment, but the optimism was short lived. The slowdown of this economic powerhouse will adversely affect the 17-member euro bloc. Amidst all these the German Finance Ministry announced to slash down the budget deficit to 1.5% from 2.5% for the year 2011-12. The ministry further expects the growth of the country to touch 3% for this year. 

c. UK has it's own economic problems.

British economy is struggling and is lagging behind the world's leading economies. Growth in the UK in the 12 months to June was just 0.7%, weaker than any of the other OECD "major seven" nations except Japan, which contracted 0.9% as it confronted the aftermath of the earthquake and tsunami. However, UK grew by 0.2% in the three months to June compared to the 0.1% growth of Germany in the same period. 

d. Italy in crisis. 

Italian economy appears in tatters, as the country plunges into the vicious cycle of rising debt and austeriity measures. While the recently announced austerity package of EUR 45.5 bn may bring down the debt GDP ratio to 120% (already the second highest in Europe after Greece), it may yet choke the economic growth needed to sustain the huge debt. 

e. Hungary's problem. 

Hungary faces the problem of rising value of the Swiss Franc. The appreciation of the Swiss franc has placed enormous financial pressure on households across Hungary, Poland and Croatia that took out Swiss-franc loans in the middle of the last decade because they had far lower interest rates than loans in their domestic currencies. These debt woes have acted as a brake on national economic growth, dragging on consumer confidence and spending, and pushing governments to act. Economists estimates that Swiss franc-denominated debt is equivalent to between 15% and 20% of Hungarian gross domestic product.