We have gone through a painful days in the 2008 subprime crisis which caused the global meltdown on economy. It is just few years over, yet again we are witnessing a another global slowdown is showing its face. There are dozens of economists warning the politicians to make the changes in the policy to avert or mitigate the impact of the upcoming recession. But, on the other hand dozens of investment media telling that the stock market slowdown is temporary and we will see the strong recovery ahead.
But, what is the real scenario of global economy and will we face another recession?. Especially people who are salaried looking nervelessly to see the impact of the ongoing economic slowdown because they will be affected most if the companies started reducing the headcount. This article explores the current situation of the economy and what are the important indicators showing the slowdown. The indicators will be taken from the Indian industry and its recent output. Apart from that a quick roundup of global events like Europe debt problem, US crisis, etc. would give you fair idea on the situation. If you have any thoughts, please post it in the comments section. Subscribe to our future articles here.
OECD Composite Leading Indicators (CLI)
Organization for Economic Co-operation and Development (OECD) is a Paris based research company which is doing the research on economic and important indicators. It has recently released the OECD CLI indicator, which is taken using the countries industrial production which used for finding the economic activity before 6-9 months actually it happens. It is one of the important indicator used by the companies to take any decision on the investment.
Linked to this CLI, OECD tracks the economy through the four stages: expansion, down-turn, slowdown and recovery. 100 is the base point set as the long term trend line, the following is trend and stage associated:
- Above 100 and increasing – Economy is in the expansion mode
- Above 100 and decreasing – Economy is in the down-turn mode
- Below 100 and decreasing – Economy is in the slow-down mode
- Below 100 and increasing – Economy is in the recovery mode
In the past, OECD CLI indicators have shown the clear idea on the direction of economy. In the recent data released by them is not encouraging and it shows that economy already started to enter in the slowdown phase where recovery is not yet started. Which implies that the worst days are yet to come. The following are the Composite Leading Indicators (CLI) metrics:
Source: OECD CLI
The above table clearly shows the direction where the economy is going. As we aware CLI has the lead time of 6-9 months of time, we are yet to feel the worst time.
Purchasing Managers Index (PMI)
It is another strong indicators to judge the economic activity. An indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. This index takes the 850 purchasing managers of manufacturing and services companies across the country. It tracks the details of new orders, employment, backlog of work and stock of raw materials every month. The following is the list of past Manufacturing PMI and Services PMI:
The above table shows the two kind of PMI manufacturing PMI and services PMI both are showing the decrease in the value. Clrealy shows that last few months it started constantly go down. A PMI of more than 50 represents expansion of the manufacturing sector, compared to the previous month. A reading under 50 represents a contraction, while a reading at 50 indicates no change.
Another factor to worry is in the recent months the hiring too has been reduced. The employment index for the services sector has fallen below 50 contracted level which is not at all encouraging.
US Economy and Its Problem
The above sections explained the lead indicators in India shows the slow down in numbers. If you are look into the reason why we are facing this less number of business coming up, world’s biggest economy and leading job creator in the world USA itself in the problem of sustaining the growth momentum amid the ongoing issues huge debt, rating downgrade by S & P, rise of unemployment,etc.
There was more number of companies become bankrupt because of the 2008 subprime problem (What is Subprime crisis?), US govt, has to involve and bailout the banks and insurance companies to save the people’s money. This cost very huge amount for the government which has increased its debt which is not manageable now. After the bailout of companies, the industry has slowly recovered and created jobs with the price governments going the painful days of managing the huge debt which resulted in the sovereign debt problem.
The problem is, governments itself has no money to spend for the infrastructure and welfare activities. In the coming months, US govt. will announce the austerity measures to reduce its expenses and increase the tax for its citizens. It is must for them to handle the huge debt. President Obama has already panned out his plan to increase the taxes for rich people. As we know, this may again slow down the economy because of the people started reduce the spending.
Euro Zone Problem
It is the major problem in the global economy. Many countries in the Euro zone has problem of high debt and depends on other major economies to bail out periodically. For example, the country Greece has been bailed out several times and still they did not provide any concrete solution to solve the crisis. It cause the neighbor countries and the entire Europe to be affected. As of now, the only country in Europe without its own problem is Germany, one of the biggest economy in the world leading from the front. Second biggest economy in the Euro zone France too has its problem.
In my previous articles I have explained in details about the Euro problem and Sovereign debt crisis. The recent news shows that Greece would finally bankrupt in the near future if the bailout is not success. The following is the list of companies in Europe has problem:
Apart from the above countries, major economies like UK and France too has its own problems to manage the debt. If you look into Indian and Chine, the export of our business is largely depends on these countries. The numbers shows that China is already started slowdown because of its export is reduced.
What is the solution?
It is very difficult to predict the outcome of this problems. One thing is clear that to solve these problems all the countries to come together and take some amicable decisions to avert the twister like disaster for the world economy. Country leaders to throw away their ego problem and discuss on the issues. It unlikely to happen between major economies like USA and China. What we can do is wait and watch the show as it goes to the next level.
China is slowly dominating the USA because of their huge debt and China is the largest creditor for them, they would become the super power after one decade. India is having its tough time if China takes the lead, because India never had a good relationship with China.
What you have to do?
If you are salaried, then you must be ready to face the biggest slowdown we have faced till date in our life time. This could be shocking words, but reality is that world is moving towards the big change in its century. This change could be change of power or something else. You need to prepare for your tough time and we will go through the less painful days if we plan from now. Please don’t just rely on your job, have a good savings plan and do the investments for your future which will protect you in case of lay-off from your company or your business is going on loss.Always remember the following points:
- Think twice if your job is safe. If you think it is not safe, try to look for alternative if you can get.
- Start preparing for the contingency fund, this would help you when worst thing happen in your life. Every must have the contingency fund to meet emergency needs.
- Refresh your skills and be competitive in your industry.
- Stay away from the stock market investment, as interest rates are high in the banks, for the next two years better to have safe investments like fixed deposit.
- Be confident on you.
May be, few readers would think that this article is more exaggerated on the topic. But, the popular economists and investment gurus warning the signal of major global slow down ahead. This article took the reference from various sources and composed with more accurate details. It is always better to be well prepared for the future that too its gloomy. If you have any thoughts, please post it in the comments section.
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