Will uncertainty about global growth and public finances continue?


Aug. 18 2020, Updated 5:18 a.m. ET

The West

Global growth is still recovering from the financial crisis that affected the world economy in 2009. All major economies—developed as well as emerging—face their own set of key risks and issues that tend to weigh down economic growth.

The U.S. is still trying to boost investment and spending to pre-crisis levels through quantitative easing. Europe is following suit with its own set of rate cuts and targeted asset purchases to recover from the sovereign debt crisis that weakened the economy after the 2009 financial crisis. The commodity-driven Latin America needs to find a way to boost its exports.

The East

Eastern countries may seem to be in a better position compared to their western counterparts. But you can’t turn a blind eye to the country-specific or macroeconomic challenges that face these economies either.

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Aging demographics and mounting sovereign debt burdens are the two key issues weighing down the Japanese economy presently. Though India and China continue to dominate the Asian growth story, China faces a slowdown in its manufacturing sector, which drives its economy. India and Indonesia have new governments whose effectiveness remains to be seen. In any case, it will take some time for their reforms to have a material impact on growth.

The world

Along with country-specific risks, each of the above-mentioned economies currently faces the three biggest global risks.

  1. A slowdown in China’s growth has far-reaching consequences for economies throughout the world—especially resource economies that have grown reliant on China’s growth.
  2. The transition to a “normalized” interest rate environment will be difficult. Rising interest rates carry the risk of a cutback in spending and investment, hampering growth. So the timing and magnitude of a rate rise will be critical to causing minimal disruption to global growth.
  3. Aging demographics will significantly pressure economic growth prospects and public finances in major world economies including Japan, Latin America, Europe, and China. The challenge falls on the governments of these countries to address the issue while safeguarding economic growth and public finance.

The impact of increasing risk in an economy reflects in the performance of broad market exchange-traded funds such as the SPDR S&P 500 ETF (SPY) or the Vanguard Total Stock Market ETF (VTI) for the U.S., the Vanguard FTSE Europe ETF (VGK) for Europe, the iShares MSCI Japan (EWJ) for Japan, the WisdomTree India Earnings ETF (EPI) for India, and the iShares China Large-Cap (FXI) for China.

To learn about the long-term prospects specifically for the BRICS countries—Brazil, Russia, India, China, and South Africa—read our Market Realist series Why the long-term prospects for the BRICS network are positive.

You can also check out the video below:


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