The global economy took another turn for the worse in July 2012, as economists feared that Spain may require a eurozone bailout. With growth in the United States also failing to impress the financial markets and employment and consumer spending remains stubbornly bearish, Japan remains one of the few strong economies left in the developed world.
SEE: Top 10 Bailout Money Recipients
Uncertainty Cripples Growth in the U.S.
The U.S. may be one of the few developed economies experiencing growth, but the combination of stubborn unemployment and unimpressive export growth could pose a problem. Companies are feeling the burn as high unemployment has dampened domestic consumer spending, while weakness in Europe and Asia have hurt export pricing and volume.
The impact of these dynamics was clearly visible in many June economic indicators, with some 77% coming in below economists' expectations. According to the Conference Board, "the strengths among the leading indicators have become less widespread as consumer expectations and manufacturing new orders offset gains [in other categories]."
Unfortunately, economic indicators for July didn't show much improvement. Non-farm payrolls dipped to 80,000 versus 100,000 expectations, while the unemployment rate edged up to 8.2%. Retail sales also fell by 0.5% compared to a 0.4% expected gain while building permits and existing home sales data failed to impress the markets.
Looking ahead, traders will be watching closely for any further signs of deterioration, particularly in leading indicators like consumer sentiment and PMI data.
SEE: How To Combat Youth Unemployment
Spain Threatens to Bring More Pain in E.U.
The eurozone's problems continue to compound, as Spain now appears to be entering a recession by most economists' estimates. During the second quarter, the country's economic output contracted 0.4%, having already fallen by around 0.3% during the first quarter. And overall, the country's economy is expected to shrink by some 1.5% this year.
Spain's growth has also led to a number of problems for its finances. In late July, 10-year Spanish bond yields reached a peak of 7.51%, its highest level since the euro currency was established in 1999. These rates are well above the 6 to 7% level that many economists believe would eventually close access to the public markets and force it into a bailout situation.
Economists have warned that the collapse of a larger member economy could result in a breakup of the eurozone. Spain's economy certainly meets the criteria, accounting for nearly 12% of the eurozone's output, which is twice as much as Greece and Portugal combined. And already, the country has shown signs of desperation with a ban on short selling.
Moving forward, traders will be watching Spanish and Italian 10-year bond yields for positive signs, while looking towards the EMU and the ECB for more promising solutions to the crisis.
SEE: Inside Spain's Consolidation Program
Japan's Domestic Market Props up Demand
Japan has proven to be a bright spot in an otherwise dull global economy. Driven by consumer spending and earthquake reconstruction efforts, the country is set to grow 2.2% between March 2012 and March 2013. Growth is also being helped by a healthy demand for automobiles – a staple of the country's domestic and export economic output.
Thanks to its economic success, the Japanese yen has been appreciating against other currencies, making the country's exports more expensive. Japanese Finance Minister Jun Azumi has vowed to fight this appreciation, saying that he would not rule out any measures against excessive yen gains, presumably including interventions by the Bank of Japan (BOJ) in the forex market.
SEE: Wall Street History: Japan Inc, Bailout Beginnings And Tax Reform
Britain Continues to Struggle without Stimulus
Britain's economy is poised to report its third straight quarter of contraction, driven by reduced domestic demand and a worsening eurozone crisis. While some economists attribute the weak results to an extra day of work lost due to a holiday, the quarter marks the country's first double-dip recession since 1975 and is causing some problems for politicians.
Recently, the International Monetary Fund (IMF) warned that George Osborne's strategy of austerity could have long-term implications for the economy. The organization recommended targeted tax cuts, increased spending on infrastructure and welfare/public sector reforms to help jump-start growth, which came as a surprise to many given Osborne's historical support.
SEE: Can The IMF Solve Global Economic Problems?
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