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Is global economy in danger?
Thu, 27 Sep Pre-Open

Despite scattered signs of improvement, the world economic situation and prospects continue to be challenging. The recent stimulus plans announced by the US Federal Reserve (QE3) and by the European Central bank (ECB) may stop the global economy from bleeding but it is still not out of bushes. According to New York University economist Nouriel Roubini, there are four factors which could derail the entire global economy.

First - The Eurozone will suffer a deeper recession than forecast, coupled with substantial financial disturbances and huge political uncertainty.

Second - The risk of conflict in the Middle East. The ongoing tensions between Iran and the US regarding nuclear weapons could cause a spike in oil prices. This would have a significant impact on the global economy.

Third - China's economy, the largest source of growth in global demand, is slowing sharply. Domestic and external demand is weakening far more rapidly than expected. Financial markets are still hoping that resolute monetary and fiscal policy responses will be enough to turn the economy around. There are powerful reasons why markets will be disappointed. Chinese policymakers' room for maneuver is limited. The economy is challenged not just by a slowdown, but also by inflationary pressures and speculative behavior, especially in real estate that had created imbalances in the economy and triggered public anger.

Fourth - The US might reach a fiscal cliff by start of next year. Fiscal cliff is a combination of expiring tax breaks and automatic spending cuts kicking in at the same time and threatening to throw the economy into a recession next year if left unchecked. The US economic recovery will remain modest at best and therefore highly vulnerable to external shocks such as renewed financial distress in global markets or weakness in major export markets such as Europe and China.

Each-one of the above mentioned factors alone could trigger a global economic downturn because they are all systemically important, let alone if several of them were to occur at the same time. If the latter would happen, a perfect storm situation would be created that would deal an already tepid recovery a major blow in 2013.

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