Globalization Flashcards
What is the role of the European Central Bank?
The ECB’s key role is to make sure that the inflation moves at a steady pace.
The main interest rate at zero
Explain the global oil situation.
Oil is headed for a price of $100 a barrel after a drone attack in Saudi Arabia, which disrupted the global oil supply.
Safe haven currencies and gold will increase as a result of the attack –> caused by future uncertainty.
When oil prices go up, we have to spend more money on gas which reduces our disposable income - this in turn reduces consumer spending, which will hurt the economy in terms of demand and thereby reduces supply which weakens the economy. Consumers are a big part of keeping the US economy going.
military conflict between US/Saudi Arabia is low but tension is high. If miitary conflicts arise, we will head for a global recession from price rise on oil –> inflation –> drop in real wage –> drop in consumption.
Uncertainty would hit investments, causing CB to react. Risky assets would sell and safe havens would rally
Explain the trade war situation.
Trade war between US and China has been worrying, as export fell after seeing 10-20% increase every year.
China slowed down and let their currency depreciate to offset tariffs, but did not work.
US and China have reached to an agreement of a deal, to pause the war in time for christmas, and this has already shown a big increase in exports. The process is considered to be phase 1, but no formal papers have yet to be signed to secure the deal.
However, this may just be temporary, as it is likely that Trump will stop the truce and start the trade war again if he is reelected –> the truce is a ploy for reelection.
Explain the Brexit situation.
Brexit uncertainty has caused business spending to slow.
No-deal brexit would likely lead to recession, as it threatens household sentiment, business investment, and cross border trade as policy makers lack the means to fully mittigate.
It appears that Brexit will happen by the end of january 2020 with conservative majority. Next step is to reach a trade agreement with EU, however, brexit is planned regardless of a trade agreement.
Explain what the purchasing manager’s index (PMI) is, and what the current level is.
PMI is an indicator for manufacturing and services, and is the index that economists pay the most attention to.
The threshhold level for the ISM is 50. 50+ means expansion in the manufacturing sector relative to last month, and vice versa.
ISM did not predict previous recession –> relying on one indicator is not enough. Focus on trouble spots:
- look for imbalances/trouble spots
- which major sector, market or economy is out of sinc with fundamentals
- what are likely consequences of a hard landing of the market or economy in question
Define slowbalization.
the slowing of international trade, investments, loans and supply chains, marking a distinct shift away from an era of global manufacturing.
Explain the role of the world trade organization (WTO) in the international economy.
An international organisation that regulates global trade among nations.
Serves as a platform for members to settle and negotiate trade issues.
The goal is sustainable economic development and to raise standard of living.
What is the WTO forecast for trade in 2020?
Trade is forecasted to increase to 3% in light of the recent deal between US and China, however tension means that there is still uncertainty and it is the greatest risk for trade growth
Explain the great recession.
The great recession began in 2007 and ended 2009. Concluded by IMF to be the most severe recession since the great depression.
Housing market caused the recession with a low interest rate that encouraged people to borrow and buy what they could not afford, making the GDP skyrocket. Low interest rate –> increase in house demand –> increase in house prices + supply –> faster price increase than interest rate –> market saturation
Warning signals: house prices were falling and permits were decreasing.
since people couldn’t sell their houses, they couldn’t afford to pay back their loans, leading to losses in the financial institutions.
The US employed an expansionary policy (fiscal stiulus, cuts in interest rates, bailouts for financial sector) which saved the economy.
Define quantitative easing.
Unconventional monetary policy used to increase domestic money supply.
encourage investment and lending in the economy by keeping interest rates low.
Consumption and investments are boosted.
Define austerity.
Economical policies a government implements to control public sector debt.
Three primary types:
- cutting non-essential government spending
- lowering taxes
- lower taxes and government spending
What is the consumer confidence index and what is the current level?
A statistical measure of consumers’ feelings about current and future economic conditions, used as an indicator of the overall state of the economy from surveying everyday people.
It is a useful indicator, as consumption covers 2/3 of GDP and is associated with leading indicators such as unemployment. The market is reactionary and so decreases in CCI will have negative impacts on the stock market.
A value of 100 or above indicates expansion, and it is currently at 125.5 but has been decreasing for the fourth month in a row.
What is the current US unemployment rate?
3.5%
What is the FED interest rate?
1.5-1.75%
