The year 2010 has been a year of continuity. It signified a continuation of the decline of economic superpower status of the US, and shrinking of economic activity in Europe due to the debt crisis. This year also signified a seamless movement towards eastern nations assuming more economic power due to sheer economic growth in their countries. A process that started in 2008 after the subprime crisis could be considered a dawn of a new era, somewhat similar to US assuming superpower status after the second world war. Before the world war, UK was considered to be a superpower, a kingdom where the sun never sets.
Some of the major financial events of 2010 are:
Euro debt crisis
In early 2010, fears of sovereign debt defaults concerning the PIIGS States (Portugal, Italy, Ireland, Greece and Spain) and Belgium arose. This led to a series of downgrades on government paper, and created a crisis of confidence in European nations. The debt crisis had been mostly centered in Greece. Greece's national debt, then put at USD 413.6 billion, was bigger than the country's economy.
The IMF lent 110 billion Euros to Greece to save it from bankruptcy and Euro nations set up a trillion dollar rescue package under the European Financial Facility. Many countries have adopted austerity measures and are trying to avoid defaults.
However, the debt overhang is so high that it is expected to linger on for a few years.
Quantitative easing
Even though the US faces problems similar to Europe, its approach to solving them has been different. The US Fed is willing to expand the economy by printing money - quantitative easing (QE). Through QE, the US Fed is trying to push the US citizens to spend, and to move away from safe government treasuries to more risky assets such as stocks and corporate bonds. This migration is necessary to boost confidence in the US economy. The Fed may have achieved much of that goal as the US markets posted strong gains and were on course to finish 2010 with strong gains.
However, this second QE has increased the wariness in Asian markets, including India. Asian markets have under-performed since then. The dollar deluge has increased the threat of inflation. Both India and China have a serious battle with inflation on their hands.
Emerging markets more powerful
Emerging Market Economies (EMEs) is a loose term for a world that is diverse and evolving. Currently, it represents China, India, Brazil, Russia and Indonesia. Due to their increasing economic growth, the EMEs are getting a greater say on the global stage. For example, many developed nations are now recommending India for a permanent seat in the UN Security Council. The voting power of EMEs at international financial institutions has increased by 3-7 percent in 2010. Given their continued economic growth, EMEs in 2011 will claim more influence in various UN bodies such as the G-20 and APEC.
China is world's second-largest economy
China surpassed Japan as the world's second-largest economy in August 2010. China's surpassing of Japan is an indicator of its increasingly dominant role in the global economy. China overtook the US as the biggest automobile market and Germany as the largest exporter. China is also the world's biggest buyer of iron ore and copper, and the second-biggest importer of crude oil.
China may even overtake US in the next 20 years or so. This is because in 2010 China is at the peak of its 'generational dividend'. China's dependence ratio is expected to bottom out in 2010 at 0.4 and start to increase due to the one-child policy. China's increasing dominance may not be favourable for India politically.
However, its impact on Indian investments is expected to be neutral.
