There is an old saying in Turkish: “Calamities do not appear one by one but come all together.” The present situation of the world economy almost justifies this old saying. In the United States, President Barack Obama unveiled his job strategy but again a big fight awaits him in the Congress. The president is not alone in trying to stimulate economic activities all over the country. According to recent rumors, the Federal Reserve Bank, or FED, is also considering implementing “unconventional” ways to revive the economic recovery. It is understood that as economic indicators have worsened further, the FED’s worries about inflation have receded. Is it wishful thinking by business or is it an impression taken from Federal Reserve Chairman Ben Bernanke’s remarks? Nobody is sure.
On the European front, there is also unpleasant news. First of all, the remarks of the European Central Bank President Jean-Claude Trichet on economic risks, uncertainty and weakening economic recovery have produced a negative impact on financial markets. These remarks were understood as an opening of the door to interest rate cuts if needed so as to stop a recession, but created near-panic among professionals as they remembered that the same Trichet advised interest rate raises a short time ago.
The Greek government at last received an ultimatum from the leaders of the eurozone that if the promises to cut budget the deficit were not kept, further rescue money would be withheld. The problem is the Greek economy shrank in the second quarter by 7.3 percent, which was worse than expected, and although unemployment rates fell from 16.6 to 16.0 percent in June, the biggest difficulty facing the government is still trying to keep promises.
On the other hand, the OECD is cutting its growth forecast for this year and has advised central banks to loosen their monetary policies in the event that there is any sign of recession. It is quite interesting to observe whether four Asian central banks, in South Korea, Indonesia, the Philippines and Malaysia, would have held interest rates steady, had they taken this advice more seriously than the central banks in the western hemisphere. All of this gave the impression that their first concern was not inflation but a slowdown in the U.S and in Europe. In addition, as the consumer price increase dropped from 6.5 percent to 6.2 percent in August in China, the same attitude is expected from the country’s central bank. (Surprisingly, news about China’s inflation had a more positive impact than Obama’s jobs package on international markets).
In the United Kingdom, the private business is calling for stimulus packages when the government’s main aim is cutting deficits. It is understood that the government will continue to cut spending and to reduce debts in spite of the slowing economic recovery. Another interesting act in Europe was Switzerland’s move to cap the rise of its currency. This act, maybe unexpectedly, created a bit of turmoil in international currency markets and was criticized by many countries for the probable negative impacts on their exports.
As if all this demoralizing news was not enough, the new chief of the International Monetary Fund, Christine Lagarde, pointed out that downside risks have increased in the world economy. Not long after, Germany’s top representative in the European Central Bank, or ECB, Jürgen Stark, resigned. This was the second resignation of a senior German official from the ECB in recent months. It is believed that they were both against the salvation policies of the ECB. The downgrading of two important French banks by Moody’s also created further turmoil, especially in Europe. All this discouraging news naturally jolted markets.
And even before this column is printed, who knows how much similar news might emerge?