Euro Zone Economic Contraction

Despite predicting a three and a half percent global economic expansion in 2012 the International Monetary Fund expects a Euro Zone economic contraction. According to the IMF the Euro Zone economies will shrink by about three tenths of a percent this year and grow by just under one percent in 2013. The European economy, in fact, is number one on a list of concerns. There is a sense that Euro Zone fiscal austerity measures have been too strict, cutting off growth at a time when the collective European economies need to grow, produce jobs, and produce income to pay the debts of various Euro Zone economies. Besides the likelihood of Euro Zone economic contraction, the risk of Middle East problems driving up the price of oil, and a burst real estate bubble in China, are of continuing concern.

Euro Zone Economic Contraction

Although the IMF expects to see the collective world economy grow this year the fate of the world’s two largest economies, the USA and the European Union, have more to say about the final numbers than anyone else. As United States manufacturing expands , the USA appears to be slowly but surely extracting itself from the worst recession in three quarters of a century. On the other hand, there are plans for an even larger Euro Zone bailout fund as Spain threatens to replace Greece as the nation most likely to default on its sovereign debts. If things go worse than expected in the Euro Zone the global growth rate could be cut by a percent or even two.

The Arab Spring, Rebellion in Syria, and Iran Wants the Bomb

With Euro Zone economic expansion, reduced industrial activity in China, and an ever so slow US recovery one might expect to see low to moderate oil prices. But, whenever the Middle East threatens to blow up, oil prices scurry upwards. Foreign currency exchange rates then adjust as oil is most commonly denominated in and paid for by US dollars. When Syria’s President agreed to pull back his troops recently, the Forex response to a Syrian ceasefire was less than hoped for as traders, correctly, believed that the civil war would continue. Iran is said to be purifying uranium to a level needed for a nuclear bomb. The European Union, the United States, and others have been steadily applying economic pressure and Israel is believed to be considering military action. A blockade of or simply military action near the Straits of Hormuz would bottle up a substantial portion of the world’s oil supplies. This would not only drive up the price of oil but also wreak havoc with Forex exchange rates across the board.

Chinese Real Estate, Brazilian Exports, and Indian Peace with Pakistan

The Chinese real estate bubble may well burst this year, which would cause tremors in China and in Forex markets across the globe, Also, Chinese exports are down and China reported its first monthly trade deficit in more than a decade. Brazil, India, and Russia are also expected to see slower growth based on reduced trade as these economies depend on the USA and EU as customers. A Euro Zone economic contraction will help drive down growth prospects in these nations and a more severe Euro Zone economic contraction could conceivably drive these nations to low single digit growth in 2012 and 2013. A decidedly bright ray on the horizon is the fact that India and Pakistan are talking and that could lead to a more stable region. Forex and stability on the Indian subcontinent are intertwined and this could be the best news of the year.