Expectations regarding World Economy: A Global Analysis

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U.S. government shut down

I bet you that the terms “shut down”, “restart” and “escape” remind you all of your desktop or laptop computer, they are options on your menu or the button you press when you want to avoid something…so what on earth is going on lately and why have these words entered the news headlines regarding the world economy?

Let us see what is going on amidst the nervousness of the global markets. The, at least partial, shutdown of most non-fundamental operations of the U.S. government was the result of the inability of the Congress to reach an agreement on the government budget for 2013-2014 and comes as the icing on the cake of the 3 year long frictions between the Democrats and Republicans. This is not the first time that such a shutdown comes into effect, since it as actually happened another 17 times in the past, the most recent one being in 1995-1996 during the Clinton administration and it lasted more than 20 days. We should not forget however that back then the economy was in a much better shape than what it is now.

This shutdown is expected to affect consumption and the payment of loan installments, since a lot of employees have been forced to go on unpaid leave. According to an initial estimate from Moody’s if the shutdown lasts for 2 weeks the U.S. GDP is expected to drop by 0,3%.

Initially, the markets – especially the Dow Jones – reacted calmly to the deadlock in Congress, as investors appeared to have anticipated such a development, while they also expected that this shutdown would only be a temporary state and that a consensual solution would soon be found as has happened in the past.

However, as days go by and the impasse continues, all the relevant problems get exacerbated. What comes to add to the concerns of the markets as well as investors, including binary options traders, is an announcement by Fitch which points out that although the rating of the U.S. economy is not expected to be affected by the budget issue, a failure to raise the country’s debt ceiling will have a chain of negative effects both for the American economy, but also for the world economy as a whole.

The debt ceiling is currently at 16,7 trillion dollars and is going to run out on 17 October 2013. If this ceiling is not raised then bonds will not be able to be issued, leading to a significant rise in taxes and reduction in expenditure throwing the economy back into recession. The debt ceiling has been raised 78 times until now without causing significant tensions, but lately this does not appeared to be so straightforward, since in 2011 Standard & Poor’s had to degrade the rating of the U.S. economy for the first time in history in order for an agreement on the debt ceiling to be reached.

The developments on the issue of the shutdown, the budget and the debt ceiling are also expected to affect the decisions of the Fed regarding the tapering, which was expected to have already happened, but was postponed for later in the year and is going to reduce the cash flow for the market. We should note here that the IMF director claimed that the tapering is potentially dangerous as it will lead the economy into unchartered waters.

Let us now cross the Atlantic and land on another terminology, that of restart… Restarting the European economy is termed as a dire need. Recently publicized PMI manufacturing data reveals a slow down in the growth rate of the European economies, in contrast to a 0,3% positive growth rate that was recorded for the second trimester of 2013. What is even more alarming is that strong economies, such as Germany, also show signs of slow down, and also an unexpected increase in unemployment rates according to the most recent Eurostat data.

The prospect of a restart looks difficult to achieve. The European Central Bank has kept its rates low and does not exclude the possibility of further intervention, but also expresses its concerns over the prospect of an extended crisis in the USA. However, Europe has its own problems to solve, and solutions are needed immediately, both in the economic field as well as in the political field, with talks for forming an alliance in Germany and overcoming the Italian political crisis.

So while the U.S. shuts down and Europe is attempting to restart, what is Japan doing? Well, it is trying to escape from the course of constant increase of its public deficit and has therefore decided to raise the sales tax from 5% to 8% in an unprecedented move that has been characterized both as bold and as too risky or even doomed to fail and backfire….

Shut down, restart, escape…one thing is certain…things don’t look that good. Actually they are pretty much volatile, so it is perhaps better if binary options traders hold their positions and wait the storm out for a bit longer. It doesn’t mean that good opportunities do not exist even in this uncertain environment, but they are much harder to discern and need careful examination and well-thought of decisions. Besides, good things usually come to those who wait.

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