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A decade back, growth in American economy was closely watched to assess whether the world was heading towards a recession. However, things have changed a lot since the past decade. China now accounts for a third to the world's growth, compared to a 17% contribution by the US economy. A decade back the ratio was inverse with China contributing way less to the global economy. Thus, world is heavily reliant on China for its contribution to the global economy.
History also states that in the past 50 years, global recession has on an average hit once in every eight years and has lasted for about a year. Considering the last recession period in 2008-2009, is a global financial crisis about to strike us soon?
The debt taken by China is one of the many reasons which may impose a threat to the world which is already slipping into recession. As reported in a leading financial daily, China's debt has grown at a pace which is almost double at which its economy is growing. To add to this, in order to facilitate the economic growth, China has on various occasions cut its benchmark interest rates. The move is aimed at lowering corporate financing costs and pumping liquidity in the economy. However, the stimulus has not shown any positive signs so far.
Historically, a situation of global recession is evident once the global economic growth slips below 2%. Reportedly, global economic growth rate is projected to be around 2.5%. Hence, situation appears to be a bit grim at the particular moment.
However, back home too the situation has not improved drastically. Recently, exports fell by 24.4% in the month of November 2015. To add to this, imports too fell by 30.3% for the same period indicating a subdued domestic demand. The key reforms are also stuck in the parliament.
The developments in the emerging economies especially China and developed nations will be the key things to watch out for going forward. If there is further deterioration in the growth rate in China, global economy is expected to move towards another recession.
How will these developments impact your investments in equities? We at Equitymaster believe in the bottom up approach in investing. This approach de-emphasizes the significance of economic and market cycles. The approach focuses on the analysis of the individual stocks. Following this approach will immune long term investors from short term volatility in the stock markets.
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