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Eureka: Why all the slow growth and recessions?
by Joseph Gatt
2017-02-07 11:18:27
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econ01_400_01Different countries have different reasons to experience slow growth and recessions. The main factor you need to take into account is that growth is calculated based on the previous years’ performance. Not on the previous five years’ performance, not on the previous 10 years’ performance. If you performed poorly last year, your country could have strong growth rates, although most people could be struggling in your economy. The opposite is also true, as if you had a good year in 2015 but slow growth in 2016 then your economy could still be robust.

Overall, prohibitive transportation costs by land and by sea has contributed to the slow growth. The proliferation of loans for housing and small businesses has also contributed to the slow growth. Finally, fluctuations in commodity prices, with raw materials and agricultural products prices going way up and then falling way down has contributed to the recession.

Now let’s take a closer look to recessions by continent.

In Western Europe along with China, Japan and Korea, we have a phenomenon I like to call the “mid-career level consumer crisis.” What do I mean by that? Low birth rates means the average person in Western Europe and East Asia is a mid-career level worker. That is the average John Doe is someone who has been working for 10 to 15 years on his job. What does this imply? Mid-career level workers often spend very little of their income, and unless they gamble the rest, they tend to save the rest. This means a lot of shops open but can’t find ways to market to 30 or 40 year-old mid-career workers who would rather stay home and watch television. The average worker is not married and has no children, meaning the consumer rates are rather sluggish.

Another factor in Western Europe and East Asia is a very high production to consumption ratio, meaning they produce more products than they can sell. This means if the products are exportable they export them, if they’re not then they stay in a warehouse somewhere. Real estate experiences the same woes, as more there is over construction in towns that often become ghost towns, where you can buy very cheap housing but not a restaurant or a shop in sight. This leads to real estate bubbles bursting, as too much money was spent on building ghost towns and not enough people are buying housing. The same could be said about built-in office space that no one is using. Most European towns have something of a “techno valley” or “silicone valley” where no one is renting office space.

In North America, Australia and New Zealand, the problematic is slightly different. People do have children and an influx of immigrants enables robust consumer rates. The changing nature of business, from coal and textile to high-tech means that the old coal mines and textile mills have closed, leaving the way to business opportunities in household appliances, software and computer hardware products. This means coal miners, auto workers or textile workers lose their jobs, their houses have lost so much value that selling the house would mean giving up ones’ savings and moving to the silicone valley would be a very costly move. It’s important to point out that coal miners for example had rather healthy wages for a job that does not require advanced skills, and had they known, they probably would have rented and anticipated a move South.

In Eastern Europe, India and Brazil and Southeast Asia, economies are doing rather well as they are known as a market for cheaper manufactured goods. But high transportation costs now mean that for example textile produced in the US for example costs almost as much as that produced in Southeast Asia, meaning that those involved in the textile industry are thinking twice before opening sweatshops in such areas.

Finally, in Africa and Latin America, raw materials and agricultural goods have experienced price fluctuations because embargoes have been lifted in areas where products were produced, examples include Iran and Cuba. This means Cuban sugar and Iranian oil can now compete with global sugar and oil, pushing prices down. If, say, an oil producing country were to experience a trade embargo, the shortage of oil from that country would lead to higher prices. Unfortunately, or rather fortunately, in times of peace raw material and agricultural products tend to see prices fall, and the last 2 years there have been no major wars in oil, raw material or agricultural producing countries. However, media sensationalism and terror risks has meant that the tourism industry has been slow the last two years, as fewer people want to take risks after reading the news.

So stay tuned for the remedies for slow growth.  

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