U.S. economic woes just a distraction, the real crisis is in Europe

By David Olive Business Columnist

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Among the leading economic indicators to watch right now is the number of police officers deployed today to prevent a fourth straight night of rioting in London. That number is 16,000. The turmoil beginning last Saturday already has yielded one of the year’s iconic images – a woman engulfed in flames leaping from a blazing building in which she is trapped. That was just one of more than 60 fires set by rioters in London alone.
North American stock markets shed about $1 trillion in value Monday in the worst one-day session since 2008. But market losses of the past few weeks have been a mild and overdue correction to irrational exuberance, which by last May had the markets within hailing distance of the all-time 2007 high.
The markets have now fallen more than 10 per cent below their May high. Technically that marks the onset of a bear market. But in the depths of the global financial meltdown of 2008-09, the markets plunged about 40 per cent. Which is why bargain-hunters emerged on the markets by Tuesday.
The earlier market buoyancy wasn’t supported by fundamentals, given the continued anemic recovery in North American GDP and job creation. The downgrading of U.S. debt Friday by credit-rating agency Standard & Poor’s – which set off the markets’ panic selling Monday – was itself an exaggerated reaction to the admittedly prolonged and acrimonious negotiations to lift America’s debt ceiling.
A much fretted-over default by the U.S. was never in prospect, though it’s still commonly warned of by people who should know better. Tax and other revenues flowing into the U.S. Treasury this month are sufficient to cover America’s debt obligations falling due in August about six times over, absent any change in the debt ceiling.
True, the U.S. may be flirting with a double-dip recession. Then again, a stronger second-half performance may avert that outcome. In any case, after 17 consecutive months of job growth as of July, the U.S. is not the basket case suggested by downcast markets of past weeks.
Yet if the recent antics in Washington were second-rate vaudeville, the debt crises across Europe are real.
Distracted as we were by the painful side-effects of America’s unprecedented housing bubble of the 2000s, we’ve paid little heed to similar insanity in Britain, Spain, Ireland and Iceland during that period, when shakily financed new housing construction went on a U.S.-style tear.
Now Europe’s day of reckoning has arrived.
“The crisis in Europe is quickly becoming on par with the [global] financial crisis of 2008,” David Levy, portfolio manager at Kenjol Capital Management, told CNN Money this week. “The [latest U.S.] jobs report shows that things aren’t getting much worse in the U.S., but the focus is clearly on Europe.”
That’s a reassuring outlook for Canada, far less reliant on the $16-trillion (U.S.) European market than exports to the slightly smaller U.S. economy. “We can continue to see a slow rebound in the economy,” said an upbeat Prime Minister Stephen Harper, in Brazil this week for trade talks.
There even are a couple dividends for Canada here. One is that the central bankers of Canada and the U.S. have each signaled they will effectively freeze interest rates at least until next spring. That rules out a long-rumoured increase in borrowing costs by the Bank of Canada.
And there’s talk of a reverse brain drain. With many forecasters plotting a flat line for U.S. GDP growth over the next few years, and with much of Europe fiscally in extremis, the world’s best talent has that much more reason to choose Canada in seeking work abroad.
Close-hand observers don’t yet know what to make of the tens of millions of pounds’ worth of what British PM David Cameron calls “sickening” damage to vandalized buildings and vehicles in London, Manchester, Birmingham, Liverpool and other British cities.
Is this Britain’s version of an Arab Spring, driven largely by university graduates without a job for several years? College students and graduates are indeed prominent among those detained by British police, who’ve taken a dim view of BlackBerry use by social-networkers in organizing coordinated protests.
Or is it just spoiled brats venting? BlackBerry is an oddly high-end tool of choice for rioters. “They’re not homeless, these blokes,” said a cabbie calling in to a BBC news show last night. “They’ve run out of bling, is all.”
Anti-austerity protesters have already been taking to the streets of Athens and Madrid for months. Yet the powers that be in European capitals, at the European Central Bank and the International Monetary Fund are moving at a glacial pace in devising a way out the continent’s fiscal crisis.
Which suggests that social unrest in Europe will intensify before it subsides.

Impact of recession in American economy on India

Past recessions

The US economy has suffered 10 recessions since the end of World War II. The Great Depression in the United was an economic slowdown, from 1930 to 1939. It was a decade of high unemployment, low profits, low prices of goods, and high poverty.

The trade market was brought to a standstill, which consequently affected the world markets in the 1930s. Industries that suffered the most included agriculture, mining, and logging.

In 1937, the American economy unexpectedly fell, lasting through most of 1938. Production declined sharply, as did profits and employment. Unemployment jumped from 14.3 per cent in 1937 to 19.0 per cent in 1938.

The US saw a recession during 1982-83 due to a tight monetary policy to control inflation and sharp correction to overproduction of the previous decade. This was followed by Black Monday in October 1987, when a stock market collapse saw the Dow Jones Industrial Average plunge by 22.6 per cent affecting the lives of millions of Americans.

The early 1990s saw a collapse of junk bonds and a financial crisis.

The US saw one of its biggest recessions in 2001, ending ten years of growth, the longest expansion on record.

From March to November 2001, employment dropped by almost 1.7 million. In the 1990-91 recession, the GDP fell 1.5 per cent from its peak in the second quarter of 1990. The 2001 recession saw a 0.6 per cent decline from the peak in the fourth quarter of 2000.

The dot-com burst hit the US economy and many developing countries as well. The economy also suffered after the 9/11 attacks. In 2001, investors' wealth dwindled as technology stock prices crashed.

Impact of an American Recession on India

Indian companies have major outsourcing deals from the US. India's exports to the US have also grown substantially over the years. The India economy is likely to lose between 1 to 2 percentage points in GDP growth in the next fiscal year. Indian companies with big tickets deals in the US would see their profit margins shrinking.

The worries for exporters will grow as rupee strengthens further against the dollar. But experts note that the long-term prospects for India are stable. A weak dollar could bring more foreign money to Indian markets. Oil may get cheaper brining down inflation. A recession could bring down oil prices to $70.

The whole of Asia would be hit by a recession as it depends on the US economy. Even though domestic demand and diversification of trade in the Asian region will partly counter any drop in the US demand, one simply can't escape a downturn in the world's largest economy. The US economy accounts for 30 per cent of the world's GDP.

Says Sudip Bandyopadhyay, director and CEO, Reliance Money: "In the globalised world, complete decoupling is impossible. But India may remain relatively less affected by adverse global events." In fact, many small and medium companies have already started developing trade ties with China and European countries to ward off big losses.

Manish Sonthalia, head, equity, Motilal Oswal Securities, says if the US economy contracts much more than anticipated, the whole world's GDP growth-which is estimated at 3.7 per cent by the IMF-will contract, and India would be no exception.

The only silver lining is that the recession will happen slowly, probably in six months or so. As of now, IT and IT-enabled services, textiles, jewellery, handicrafts and leather segments will suffer losses because of their trade link. Certain sections of commodities could face sharp impact due to the volatile nature of these sectors. C.J. George, managing director, Geojit Financial Services, says profits of lots of re-export firms may be affected. Countries like China import commodities from India, do some value-addition and then export them to the US.

The good side of US recession

US recession may be a boon for Indian offshore software companies. Infact, even as America is moving into recession, Indian offshore companies are getting more business than ever before.
The impact of recession is undoubtedly higher to small and medium sized enterprises whose bottom lines get squeezed due to lack of spending by consumers. These thousands of small and medium enterprises are increasingly waking up to cash in on the outsourcing wave, a market opportunity explored by their big daddies for a couple of decades now.