The 2008-09 US subprime crisis led to a global market meltdown. The Euro-zone crisis is also far from being resolved. Mass rating downgrades in the region have compounded investors' fears. If this crisis escalates, the world may have to gear up for a Financial Crisis 2.0. But, this one may be even more deadly than the last. The new crisis will be more difficult to come out of since most rich countries have already exhausted their firepower. They have few fiscal or monetary resources to defend against a new crisis. Financial markets are also now unsupportive and investors are increasingly risk averse.
Even without factoring in a new crisis the World Bank predicts slower economic growth. Using market exchange rates, Bank predicts that the global economy will grow by 2.5% in 2012 and 3.1% in 2013. This is a downward revision of its forecasts in July 2011. Six months earlier it predicted that the world economy would grow by 3.6% in both forecast years. It now expects the European currency Union to see a GDP contraction and other advanced economies to grow by only 2.1%. The world definitely cannot afford another meltdown. But, on the flip side India and other developing markets continue to exhibit healthy growth. But, can this growth be sustained?
Developed nations are still the kingpins of global trade. With these countries seeing slower or negative growth, emerging market nations are not immune. They are not completely decoupled from the rest of the world. According to an article in the Financial Times, remittances sent home from workers in developed countries may fall. Banking systems in poorer countries may also be exposed to financing risks. A number of developing countries have large chunks of short-term debt falling due in 2012.
China, being the second largest economy in the world may have the capability to weather a new financial storm. However, its overheated economy and housing sector bubble are pressure points. Even in India, archaic government policies and prevailing high interest rates have stymied growth. The recovery of these two emerging giants may not be enough to save the world economy. But at least we hope that the domestic financial markets recover from the severe beating faced in 2011.