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Major news risks that can stop world economic growth recovery

Storm clouds are gathering over the global economy with a string of events including sovereign debt woes in Europe, the Louisiana oil spill and the disruption from the Icelandic volcano eruption darkening prospects for growth.

 

 

Storm clouds are gathering over the global economy with a string of events including sovereign debt woes in Europe, the Louisiana oil spill and the disruption from the Icelandic volcano eruption darkening prospects for growth, economists say. “Compared with a few months ago, all of these events have imposed increased risk on global growth,” said TD economist Martin Schwerdtfeger. “A few months ago the economies were holding pace very soundly.” TD is currently predicting world economic growth this year of 4.1%, slowing to 4% in 2011. It sees growth of 1.3% in countries that share the euro this year. The bank is scheduled to review its forecasts in early June and may cut targets if the European crisis spreads.

 

For most economists the main risk to growth at present stems from the Greek debt crisis and the possibility the problems will spread to other highly indebted European nations, such as Spain, Italy, Portugal and Ireland. The cost of insuring debt in these countries against a possible default has soared in recent weeks. If one of the countries were to actually default on its debt the repercussions on the European banking system would be severe. French bank BNP Paribas on Thursday revealed it had a $6.7 billion exposure to Greece, while Societe Generale put its risk at almost $4 billion. “It could be the real monkey wrench in the works,” Paul Taylor, chief investment officer at BMO Harris Private Bank said on a conference call. “We are very nervous to see people rioting on the streets of Greece and hope for a happy outcome. If not all bets are off.”

 

The problems have already rattled stock markets worldwide, with equities in Europe falling for a third day on Thursday. “The Canadian dollar lost more ground overnight as risk aversion trades and contagion fears were in full swing,” Knightsbridge Foreign Exchange President Rahim Madhavji said in a note. Sovereign debt is not the only problem however. The cloud of volcanic ash that grounded flights across Europe in April and again this week is thought to have cost the aviation industry billions in lost revenue, with spillover effects for other businesses unable to ship goods. The massive oil spill in the Gulf of Mexico may also have an affect on the U.S. economy, with tourism and fishing industries particularly hard hit. The cost to the fishing industry in Louisiana is pegged at $2.5 billion US, while the Florida tourism industry could lose $3 billion US, according to Sanford Bernstein figures.

 

Further down the road there is also a question mark over China. The Asian economy expanded at a blistering 11.9% in the first quarter, driving demand for world commodities. However, the economy’s heavy reliance on construction and property has led to some prominent economists to warn a bubble may be forming and that it could burst. Investor Marc Faber, publisher of the “Gloom, Boom and Doom” report and long-time China watcher warned earlier this week that the Chinese economy would slow and a crash could come within the next 12 months. “There is a concern that the unrestrained growth in China could lead to a bubble that could come crashing down,” said Jack Ablin, chief investment officer at Harris Private Bank in the U.S. “One of the issues compounding the Greek problem was that the Chinese economy may be slowing.” That would be bad news for Canada, by reducing demand for commodities.

 

Source : QMI Agency