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The "Perfect Storm" That Could Wreak Havoc On World Economy

Three key factors in the world's leading economies may slow growth again, and emerging economies could bear the brunt.

The "Perfect Storm" That Could Wreak Havoc On World Economy
Luis Carlos Vélez

BOGOTÁ — The world economy may soon face the realignment of three forces that would impact recovery and growth worldwide — oil prices, U.S. interest rates and China's economic activity.

This "perfect storm" for the economy must be viewed with care by authorities in the Latin American region, as well as worldwide, in order to minimize both the effects and duration. The reality is that another economic adjustment seems inevitable, and there are no magic pills to avoid it.

Oil

Crude prices continue to drop, without responding to any apparent market realities. The output from Arab states remains extravagant in scale in spite of the low prices, because their objective is not economic but geopolitical. Their interest is in lowering the value of crude so the United States will not have incentives to produce it, particularly through fracking. Producing shale gas would make no sense if the price of a barrel keeps falling. So, in a scenario where prices do not correspond to market conditions and the aim of the world's biggest producer is to push out its principal rival, smaller players will inevitably lose. In the "oil war" between the Arabs and the United States, those left stranded may well turn out be producers like Colombia, Venezuela and Ecuador.

Interest rates

The U.S. Federal Reserve will probably raise its rates before the end of 2015, which will prompt a reshuffling of the global investment portfolio. Money always flows toward the least risky assets with the highest relative returns. So the prospects of economic stability in the United States and finding one of the best rates of return will mean capital returning to one of its traditional safe havens. That will lower investment rates in developing economies and as we have seen in recent days, a significant fall in the price of assets like gold.

China

The Chinese economy is no longer booming. There are increasing signs that its more recent expansion was largely fueled by stock market and real estate bubbles. Recent weeks have grown dark as some of the main market indices have fallen 29% since a peak in June. Adjustment in China's growth forecasts will mean falling demand for raw materials, which again affects developing states that are among their main exporters.

The economic blow is inevitable, and it will be time to spend the reserves governments told us they'd been building up in the more prosperous times, for which they'd blamed the inability to lower our taxes. Now is the time to use them, because lean times are not thwarted by squeezing businessmen and the middle class.

The United States gave us a lesson in economic recovery, by creating incentives and protecting internal demand as a source of economic regeneration. Pressuring job creators and the middle class in times of crisis, is like smashing the engine of your economic vehicle.

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