IEEJ: July 2011

Special Bulletin
A Japanese Perspective on the International Energy Landscape (47)

June 16, 2011

Growing Fears about Future World Economy
Ken Koyama, PhD
Director
Strategy and Industry Research Unit
The Institute of Energy Economics, Japan

From the macro viewpoint, the international political situation and world economy are thetwo major important factors to influence the international energy market. Since early this year, thedestabilization of the Middle East and North Africa, an international political or geopolitical problem,
has exerted great influences on the international energy market. In addition, a new energy problem
emerged on the Great East Japan Earthquake as an unprecedented disaster in Japan and has shaken
the international market. While these developments still underlie the market situation, a new
problem is apparently emerging. That is the problem of growing fears about the future world
economy.
The problem is still limited to "fears about the future." But we now see factors for fears
accumulating in major regions of the world.
In the United States, May's employment situation data included a nonfarm payroll increaseat 54,000 that month, slipping far below a consensus market forecast of 150,000. The unemployment
rate rose from the previous month to 9.1%. The worse-than-expected employment situation data
prompted stock prices to turn downward. On June 10, the 30-issue Dow Jones industrial average on
the New York Stock Exchange slipped below 12,000 for the first time in almost three months. Inaddition to concerns about the future course of the economy as indicated by the above
macroeconomic indicators, the planned June 30 termination of the Quantitative Easing 2 monetary
policy, which has supported stock prices, might have affected the stock market.
Another factor behind the U.S. stock market decline was Europe's serious sovereign crisis.
On June 13, U.S. debt rating agency Standard & Poor's lowered the Greek sovereign rating by threenotches from single B to triple C. The agency then indicated a critical view that Greece sharply grew
likelier to default. As the Greek debt problem has grown more serious again, Irish and Portuguese
government securities trading has declined to record lows. Concerns about the euro area economy
have increased considerably. Market participants are very unsettled, fearing that if Greece defaults, it
may spill over to the whole of Europe including Ireland and Portugal. European and other countries
are considering additional financial support to prevent Greece from defaulting and market
participants are closely watching their talks with fears in mind. This is the present situation. The1IEEJ: July 2011

growing fears about the future in Europe have reduced market risk tolerance dramatically,
destabilizing the whole of financial markets.
As well as the abovementioned European and U.S. situations, we may have to pay attention
to the Chinese economic situation. China took advantage of a 4 trillion yuan economic stimulus
package to become the first country in the world to overcome the global financial crisis following
the Lehman Shock, boosting its presence as the driver of the world economy. Recently, however,problems facing the Chinese economy have rapidly attracted attention.
The first problem is inflation. The consumer price index for May posted a 5.5% rise from ayear earlier, the fastest increase in 34 months. Particularly, rural regions scored a CPI hike of 6.0%
exceeding the national average. The inflation problem is attracting attention in China because ofwide income gaps and a great number of low-income people (mainly in rural regions and evenamong a growing number of urban residents). Inflation can exacerbate social strains, becoming a risk
factor to boost discontent and fears. Price hikes have been remarkable for foods. The CPI inflation
rate for foods is as high as 11.7%, attracting great attention. Stable prices and supply of foods andother necessities are required to stabilize the public’s livelihood and sentiment. In this sense, thegovernment has no choice but to enhance anti-inflation measures including monetary tightening. In
its annual monetary stability report released on June 14, in fact, the People’s Bank of China gave top
priority to anti-inflation measures. On the same day, the central bank announced a decision to raisethe deposit reserve requirement ratio by 0.5 percentage point on June 20.
Amid the present situation, “economic bubbles” have become a matter of concern in China.
Chinese bubbles have been cited frequently along with the inflation problem and the government has
so far prevented bubbles from bursting with tightening and other policy measures, as is well known.
In this sense, bubble-burst fears could turn out to be unfounded. However, media reports have statedthat the number of investment companies controlled by local governments in China increased 25% in
two years, with their debt expanding to up to 14 trillion yuan by the end of 2010. In fact, fears ofexpanding bubbles and their burst are growing again.
Meanwhile, it is quite interesting that Britain’s Financial Times has published several
reports on fears about the future course of the Chinese economy, including the bubble problem, sinceMay. The newspaper acknowledges the significance of China for the world economy, gives attention
to the reality and importance of bubbles as China’s domestic problem, and concludes that measures
must be taken for a soft landing to prevent bubbles from bursting. It may be needless to say thatappropriate and timely monetary and economic policy measures are required to avoid economic
overheating and the burst of bubbles. But such policy management must be fine-tuned. Depending
on policy mismanagement, a hard landing could come. Therefore, the future Chinese economy andthe Chinese government’s economic policy management will attract global attention.
In response to growing fears about the future world economy, money is flowing out of many2

IEEJ: July 2011financial markets in the world, with market prices dwindling. On June 15, the benchmark West Texas
Intermediate crude oil futures price lost $4.56/barrel from the previous day to $94.81/barrel, slipping
below $95/barrel for the first time in about four months, since late February. For the immediate
future, the trend and fate of fears about the future world economy will be the most important factor
to move the international energy situation unless substantial changes emerge in the influences ofother factors (including international politics and geopolitical issues) on the energy market.
Therefore, we may have to pay even closer attention to the trend.

Contact: report@tky.ieej.or.jp

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