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CAN THE US RECOVERY CONTINUE IN 2015?

Summary: Key markets are in trouble and the American economy cannot isolate itself from their impact.

Peter Cooper is editor of ArabianMoney.net

WHEN THE US SNEEZES, THE rest of the world catches a cold. Perhaps for 2015 that saying will have to be turned the other way around.

The question to be asked is if the economic sickness spreading through Japan, China, Europe, Australia, Canada, the Gulf States and many other emerging markets will undermine the weakest US economic recovery in history?

Though the European Union is the world's largest economic bloc, China may have overtaken the US as the largest national economy by purchasing parity in 2014 and Japan is still not far behind. Other emerging markets have also become very significant players, not least because they have supplied most of global growth over the past decade. How can the world prosper without them?

Japan, Russia and Ukraine are already in recession. The Russian invasionof Ukraine and annexation of Crimeain March may have been a successin military terms but it has been an economic disaster. The combination of US and EU economic sanctions and the 45 per cent slump in the oil price since the summer have collapsed the ruble- dollar exchange rate and sent the Russian economy into a tailspin.

The impact of the Russian economic slump on the Eurozone is being played down for political reasons. Russia is the largest market for most consumer goods in Europe and its extreme economic distress is having a big impact on European multinationals.

This is not good news for the Eurozone whose own economic condition was already near to recession before the crisis in Ukraine started in March. A repeat of the 2011 Eurozone debt crisis is almost assured in 2015 and yet financial markets price EU bond risk as though it was negligible and Draghi's European Central Bank actually can buy bonds.

However, amongst the major players, Japan is the biggest immediate risk. The catastrophic money printing policies of Abenomics are taking their inevitable course and destroying the value of the Japanese yen. How long will equity prices rise faster than the currency is falling?

Japan wants to export its way out of trouble with cheap goods courtesy ofthe falling yen. But where is the demand going to come from? Key markets like Europe, Russia and even the Middle East are in trouble.

That only leaves the US as a dumping ground. It is not going to be enough and that makes Japan the weakest link and the next to fail.

The US is more vulnerable to economic fall-out abroad than commonly appreciated. Exports comprise around 14 per cent of economic output. Glorious isolation is not going to be an option for 2015.

However, the US does still have huge domestic debt issues and the most immediate on the horizon will be the implosion of the shale oil sector whose borrowings are off the charts.

Sure cheap oil is good for consumers but not if it comes at the cost of bankrupting the sector where the most capital investment has gone over the past five years. Banks and the junk bond market will come under pressure again just as problems arrive on US shores from the worsening global economy. Shale oil is the next subprime crisis.

What about the other emerging markets and the Middle East? It's a mixed bag. China is still struggling to contain the fallout from its deflating real estate bubble and Brazil is dogged by recession fears. Lower oil prices help India and other Asian non-oil producers but the rout in global commodities is bad for Malaysia, Canada, Australia, the Gulf States and the whole of Africa, especially Nigeria.

So far, the boom in stocks and bonds on Wall Street has greatly outpaced the weakest economic recovery ever in the history of the US. Expect this to work equally spectacularly in reverse.

Perhaps the US economic contraction will not be nearly as bad as in many other parts of the world this year but its impact on financial markets will be far more catastrophic.

I am not going to put any figures on this or say exactly when it will happen in 2015. But we've had the Great Recession - standby for the worldwide depression.

So far, the boom in stocks and bonds on Wall Street has greatly outpaced the weakest economic recovery ever in the history of the US. Expect this to work equally spectacularly in reverse.

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Publication:Gulf Business
Geographic Code:9JAPA
Date:Jan 21, 2015
Words:755
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