Friday, August 15, 2008

Both Europe And Japan Economies Shrink: Emerging Economies Next?

Eiffel tower EU colorsIn Q2 of this year, the Euro Zone saw its GDP shrink 0.2 percent and Japan’s GDP saw a decline of 0.6 percent, according to the New York Times. Since we have been focusing so much on the doom and gloom surrounding the U.S. economy, I thought it would only be fair to talk about the problems in the rest of the world, too.

This Euro Zone’s decline is the first quarterly decline that the group of nations has experienced since joining forces under the Euro in 1995, according to the New York Times. The Euro Zone’s two big economies, Germany and France, both contracted individually. Germany’s decline was more or less expected, and came in at 0.5 percent. On the other hand, France’s drop was a big surprise, according to the New York Times; it came in at 0.3 percent.

Japan, which represents another of the Group of 7 (G-7) economies, also has been hit hard. They reported a decline in their GDP of 0.6 percent. The G-7 consists of the U.S., Japan, U.K., Italy, France, Germany and Canada. When the group was formed, these seven countries represented the seven largest economies in the world. This make-up has changed thanks to China’s tremendous growth over the years, but these seven economies are still all toward the top of the list. Not one of these seven economies is doing well at this point, and it is possible that all of them could see economic contraction before the year is out. The U.S. has avoided one thus far, but let’s see how things look once the stimulus package impact wears out. The U.K. barely squeaked out gain in Q2 and many economists are predicting that their economy will contract in Q3. With the largest economies in the world all struggling, it seems we are set for a widespread global slowdown.

You can be assured that when all these countries slow down at the same time, the lesser economies of the world will suffer, too. No economy is completely shielded from all these economic powerhouses. Investors would do well to remember this, as well as that emerging economies, while offering diversification, are also much more volatile than developed economies. The biggest losses will likely be seen in the smaller countries. Don’t get me wrong--I’m a huge fan of emerging markets over the long term, but investors need to take proper precautions right now to protect themselves, because things are only going to get worse on the global scene.

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