The domino recession?

The signs are pointing to recession not only in the U.S., the reports on the state of the global economy are anything but optimistic

The Global Risk Report 2008, which was compiled with the help of leading financial companies, concludes that a recession is imminent in the USA, the largest single economy. The risks were rated on a five-point scale based on a survey of about 100 leading businessmen, politicians and academics. According to the survey, the greatest risks were posed by the crisis in the financial system, further increases in food prices, the sensitivity of global supply routes and increasingly expensive energy carriers. These four risk complexes serve as the basis for this year’s meeting of the World Economic Forum in Davos.

Political and economic uncertainty is at its highest level in a decade, which is why 2008 has become a year of crisis worldwide. It is considered likely that prices for real estate in the U.S. will continue to fall. This is also true for Great Britain and other European countries where speculative bubbles have developed in the real estate market. There is a risk of a general decline in consumption and a recession, the report says. The likelihood of a drop in GDP growth in China was forecast at 3.5 points, which could cost the global economy 0.25 percentage points and up to a trillion dollars.

The experts see the same probability in a "a sudden and serious fall in the dollar exchange rate with corresponding consequences for the (global) financial system". The weakening of the U.S. economy could also affect Russia, because the weak dollar also affects commodity prices. The weakening Chinese economy could also affect Russia’s economy.

The report also warns of a serious food shortage, which has been identified as one of the major risks of the 21st century. The current situation in the twenty-first century is assessed as follows. The growing world population, rising standard of living, increase in the production of so-called biofuel and climate change are made responsible for this. With enterprises such as the US bank Citigroup or the Swiss Ruckversicherer Swiss Re, which participated in the report, the compulsive optimism cursed itself obviously with the own high depreciations.

Just the coarse U.S. bank had to write off again 18 billion dollars, why it now shows a quarterly loss of 9.83 billion dollars. As it was the first US bank to present figures for the fourth quarter of 2007, further horror stories were allowed to follow. 4.1 billion in defaults on US consumer loans now also hit Citigroup. dollars, in addition to which revenues had plummeted by 70%. These figures lead Citigroup to expect the recession to continue. As expected, the financial crisis has long left the subprime market behind and is affecting the private credit card market. Banks have increased their reserves after defaults in the business had already risen by a third by the end of September. It’s a market worth an estimated $900 billion, and it strikes a chord with the U.S. consumer culture. In the second and third quarters, economic output in the U.S. will shrink by one percent for the year, Goldman Sachs specialists predict a recession. A recession is when economic output – measured in terms of gross domestic product (GDP) – falls in two consecutive quarters. For former Federal Reserve Chairman Alan Greenspan, who warned of the scenario early last year, the recession is already upon us, if the U.S. is not involved for a long time. "The symptoms are all clearly visible," he said in an interview. Earlier he had also pointed to the specter of stagflation. Goldmann Sachs also sees a risk of recession for Japan, which would affect the second largest economy. The probability of this is around 50 percent, the experts said in Tokyo last Thursday.

Crisis in Great Britain and Spain?

Dangers also loom in Great Britain and Spain, where dangerous real estate bubbles have developed in recent years. In both countries, real estate prices are falling. While prices in Spain are still falling slowly, they have slid sharply in the UK, reaching their lowest level since the recession of the early 1990s.

Here, too, the problems in the mortgage market are already filtering through to the credit card sector. In the UK, the volume of real estate loans has risen to more than a trillion pounds, and British debt is on average about twice as high as in the euro zone. It remains to be seen how long the central bank will be able to withstand the call for interest rate cuts. At 5.5 percent, interest rates are well above the level in the euro zone, but so far the central bank, unlike the European Central Bank (ECB), has refused to pursue economic policy. It justifies its policy with the fact that inflation is well above the targeted 2%, while the annual average is lower than the 3.1% in the euro zone.

The experts have now abandoned their forced optimism for Spain as well. The Swiss bank UBS, which has also been hit by the U.S. credit crisis, paints a gloomy picture of the situation there. Merrill Lynch and others also say that the crisis has already taken hold of the country. Although the government does not want to admit this before the elections in March.

The inflation rate of 4.2 percent on average for 2007 is a major concern. Unemployment has been rising again for months because the construction sector is collapsing in the face of high debt and high interest rates. Now even the government has admitted that 350,000 jobs have been lost in the construction sector.000 jobs have been lost in the construction sector, which can be seen as a very optimistic estimate

Global recession

The United Nations already sees signs of recession in the world economy. There are clear and already present signs that the growth of the world economy is coming to a virtual standstill, says the UN’s annual report on global economic development. The report cites risks similar to those identified by the Global Risk Report. "Global growth will be significantly reduced if these risks materialize, and then the crisis in the real estate and mortgage markets will be much more severe, accompanied by a rapid and deep fall in the value of the dollar."This would lead to the collapse of global growth by 1.6 percent in 2008.

The fact that the markets are preparing for such dangers can be seen in the high price of gold, because investors are fleeing into safe assets. The price of gold set a new record at the beginning of the week. A troy ounce (31.10 grams) cost $911.10 in London. On Friday, the price of gold exceeded 900 dollars for the first time in history. Silver and platinum are also highly valued. The fear of investors can also be observed in the flight into safer government bonds.