Shocks To The Global Economy

Factors which are currently affecting the global economy and their impact.

1. Food price rises in emerging countries

Food is becoming increasingly expensive in countries like China and India.

One reason for this is the harvests, which due to unpredicted bad weather, were weaker than expected. In China for example, there have been persistent droughts throughout 2010 and 2011. This leads to low crop yields and therefore higher prices which are having an inflationary impact on the Chinese economy. Imports of cheaper agricultural produce in these countries are discouraged because they have large agricultural sectors so many farmers could lose jobs due to their uncompetitive prices. Also as China and India are major world suppliers of agricultural produce, the world price of food has risen. Absolute poverty in these countries may have risen as the basic cost of living has risen due to the rise in food prices.

Another reason for this is the high world demand for commodities like food due to the increasing population and incomes in emerging countries. These countries are rapidly becoming more consumer driven and less import driven which pushes up their respective general price levels.

2. Higher interest rates and tighter money in emerging countries

Due to the rising food prices, governments internationally are tightening policies.

China has increased their reserve requirement ratios by 50 bp. This means that they have raised the amount of money that banks keep in reserves as opposed to lending out. They are doing this to try and restrain rising house prices. Many countries including China and India have also increased interest rates in order to combat rising inflation.

3. Political crises in the Middle East

These crises in Libya, Egypt, and Tunisia (to name a few) were supposedly sparked by rising fuel prices. The effect of these crises is that oil prices have risen to over $100 per barrel, pushing up international transport costs and pressuring economies which are already struggline. These prices are slowing down the global economic recovery (although this is not the only reason oil prices are rising - demand increasesfrom emerging countries and inelasticity of supply have also contributed).
Rising oil prices have negative effects on international economies as they generally push up inflation (cost push inflation) which means that spending power in the economy is reduced as people can afford less with their disposable incomes then they cold previously. This usually leads to a contraction in consumer spending and reduces the ability of house owners to pay off mortgages. 

4. An increase in interest rates in developed countries

Despite the fact that the UK wants to keep interest rates low to promote economic growth (low interest rates = cheaper investment, assuming these interest rates are passed on by banks, and increased marginal propensity to consume for customers as less is gained by saving) surging commodity prices may force inflation so high that the Monetary Policy Committee is forced to raise rates to combat it. The same is true for the US and other developed countries.

5. Fiscal Cuts by international governments

Governments internationally, and especially in Europe, are cutting back spending to try to consolidate debts and reduce deficits. The impact of this is that aggregate demand should fall (as government spending is an influence of demand as well as supply). This fall in demand could lead to a fall in the general price level and a fall in real output. Whilst most economies would welcome a fall in inflation right now, the cost of the fall in growth is high and rising commodity prices are counteracting the deflationary effect of reduced government spending. On the supply side, less government spending could mean a decrease in the quality of the workforce, decreased benefits for those in need and worsening quality of services, which hits the poorest in the economy the hardest as they rely on benefits and government provided services.

6. The disaster in Japan

As well as having devastating costs to the population of Japan (http://mashable.com/2011/03/13/japan-earthquake-tsunami-help-donate/), global markets have been hit by the disaster. Supply chains have been disrupted. This means that if a company located one stage of production entirely in Japan and others elsewhere, problems in this one part of the chain inhibit the ability of the chain as a whole to function. This means that trans and multinational companies have been hit hard. The production of japan itself also fell as the country had to focus on aid and rebuilding infrastructure. Demand for oil has risen in Japan after the nuclear crisis putting further upward pressure on oil prices.