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Decoupling Exacerbating Global Economic Instability
Decoupling Economy
Decoupling Exacerbating Global Economic Instability
  • By matthew
  • August 22, 2014, 05:15
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The global economy is becoming more and more unstable due to the ongoing decoupling between major economic blocs. The United States and Britain are recovering at a faster-than-expected pace, and the probability of a key rate hike is on the rise. In contrast, manufacturing industry indices are relatively poor in China and deflation risks are intensifying in the Eurozone and Japan.

Asian foreign exchange markets fluctuated on August 21. The won-yen exchange rate fell by 5.5 won from the previous trading day to 985.46 won per 100 yen, the lowest since 979.75 won recorded on August 25, 2008. In the Tokyo Foreign Exchange Market, the yen-dollar rate reached 103.96 yen per U.S. dollar. The Korea Composite Stock Price Index (KOSPI) lost 1.38 percent or 28.57 points to close at 2,044.21.

This is due to the economic risks arising in the U.S. and China. According to the Federal Open Market Committee (FOMC) minute for July the Fed revealed on August 20 (local time), most FOMC members pointed out that the local labor market, inflation rate, and the like, are recovering rapidly, and the current economic policy needs to be changed earlier than expected.

Under the circumstances, the Fed’s exit strategy is likely to be put in place ahead of schedule, on the condition that the current pace of economic recovery continues. If the Fed raises the base rate, an intense impact is inevitable in the financial markets of emerging economies.

In the meantime, expectations for economic recovery are waning in China. HSBC announced on August 21 that the Chinese manufacturing sector recorded a tentative purchasing managers’ index (PMI) of 50.3 in August, which is lower than the value for the previous month (51.7) and Bloomberg’s estimate (51.5). Both the credit index and the industrial production index fell last week, too.

Situations are even worse in the Eurozone and Japan. The former’s economic growth rate for the second quarter of this year was zero, and those for Q4, 2013 and Q1, 2014 had been 0.2 percent each. Japan posted a negative growth of 6.8 percent in Q2 this year to hit a 39-month low.