CITI: These 8 Shocks Are About To Slam The Global Economy


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The world is being hit with, or will soon be hit with, 8 shocks to the global economy, according to Citi strategist Guillermo Felices.It all started with surging food prices in developing markets, but now it may be spreading from the emerging markets to the developed world.

It’s important to understand how the first seven of these crises relate to one another, and how the eighth is exacerbating an already difficult situation.

We go through Guillermo Felices’ shocks and detail each, looking into how each is transpiring and impacting the global economy.

#1 Higher Food Prices In Emerging Markets

It all starts in countries like China and India, where food prices are rising. There were multiple reasons for this:

  • Weaker than expected harvests due to weather events
  • Higher demand as emerging markets experienced a strong recovery

Surging prices have put pressure on governments to act.

Source: Citi analyst Guillermo Felices

#2 Higher Interest Rates And Tighter Money In Emerging Markets

Governments throughout the emerging world have responded to surging food price inflation with tightening policies.

  • China: continuing to hike reserve requirements and rates
  • India: continuing to hike rates
  • Korea: continuing to hike rates
  • Brazil: continuing to hike rates

There are no guarantees this is going to work, however. Food prices, like other commodities such as fuel, often are unaffected by monetary policy.

Source: Citi analyst Guillermo Felices

#3 Political Crises In The Middle East

The rising cost of food was one of the key drivers behind the protest movements in the Middle East. And while the political spark could have been a WikiLeaks release or a single protester in Tunisia, the reaction has been multiplied by underlying economic difficulties.

Source: Citi analyst Guillermo Felices

#4 Surging Oil Prices

The result of Middle East political instability has been a surge in oil prices. That rise is affecting markets like China and India, that are already in tightening mode to contain price increases, but also developed markets like Europe and the United States.

Source: Citi analyst Guillermo Felices

#5 An Increase In Interest Rates In Developed Markets

Developed markets are now considering responding to rising food and fuel costs by raising rates. The move would mark an end to the easy money policies that have been in existence since the financial crisis.

The ECB may raise rates at its next meeting in early April. Tha Bank of England may have to with inflation exploding higher.

Source: Citi analyst Guillermo Felices

#6 The End Of QE2

Quantitative easing 2, the U.S. government's program for bond buying, is set to end in June. The result of this end will be a tightening of U.S. monetary policy. It's no rate hike, but it certainly will mark an end to an easy money policy that's had an influence in propelling markets higher.

Source: Citi analyst Guillermo Felices

#7 Fiscal Cuts And Sovereign Debt Crises

While central bank easy money policies are coming to an end, government's on both sides of the Atlantic are also cutting fiscal expenditures due to sovereign debt worries.

These cuts are most obvious in Europe, where states like Greece and Ireland have been forced to consolidate fiscal policy by the IMF and EU, but they are also evidenced in states like Spain, where the government is trying to get ahead of the problem.

Across the Atlantic, the new U.S. Congress is fighting for budget cuts that will reduce stimulus spending.

All of this means less government support for economies that have not yet reached full recovery.

Source: Citi analyst Guillermo Felices

#8 The Japanese Disaster

On top of this established trend line comes the disaster in Japan. Beyond the horrible death and destruction created by the earthquake, tsunami, and reactor crisis, Japan's economy is now under threat from reduced production and supply chain issues.

The country will also be demanding more oil, as it tries to make up for its loss in nuclear power. This will add to the surging oil price problem.

Source: Citi analyst Guillermo Felices

And what's the financial impact of that Japanese disaster?

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