Most economies around the world continue to slow. This is important because the economic strength or weakness in a region impacts the job market, the availability of credit, the price of consumer goods and services, wages, and a host of other items.
When an economy weakens, suffering tends to increase. That suffering is greatest in the world’s worst economies and some of the reasons for the slowdown.
Economic expansion or contraction is measured by GDP or Gross Domestic Product. When an economy is growing, jobs are more plentiful and people’s standard of living tends to improve. Conversely, when an economy is contracting, many companies cut staff to reduce expenses, which pushes unemployment higher. At the present time, the global economy is slowing with China leading the way.
The table below contains data on the world’s four worst economies on a year-over-year basis. I have also included the three largest economies for comparison. The column, “Economic Rank” shows the size of each nation’s economy (i.e. total GDP) relative to all others. “GDP (Year/Year)” measures the growth or contraction in the economy from the previous year. “Interest Rate” is the rate set by each country’s central bank (the equivalent of the Federal Reserve Board). Finally, “Debt/GDP” shows each country’s public debt as a percentage of its GDP. This last item is especially important as it provides an indication of a country’s ability to repay its debt.The percentage change in GDP of the four worst countries ranges from -2.40% to -4.60%. To put this into perspective, U.S. GDP during the Great Recession of 2008 was -4.1% (adjusted for inflation). Even though the GDP figures are similar, other data suggests that these economies are on an unstable foundation. One difference is the U.S. was not nearly as dependent on the price of oil in 2008. It is important to note the abnormally low interest rates and level of inflation in the U.S. and Japan. With interest rates already at or near zero, the Fed and the Bank of Japan have no place to go if economic conditions worsen. In addition, with inflation at 0.20% (Y/Y) plus a slow economy, there is considerable risk of deflation in the U.S. and Japan. This is something Japan has struggled with since the early 1990s. This is significant because the U.S. and Japan comprise over 20% of the world’s GDP. Let us look at the worst economies and briefly review each country’s situation.
Russia
Rank by Population: 8th
Rank by Economy: 10th
Russia has the dubious distinction of having the world’s worst economy. The biggest cause is the precipitous drop in the price of crude oil. According to the U.S. Energy Information Administration, in 2013, oil and natural gas sales accounted for 68% of Russia’s total export revenue. Moreover, during the 20-year period from 1995 through 2014, each year Russia was among the top three oil-producing nations. Thus, the drop in oil and natural gas prices has created a rather untenable situation for the Russian government and people. This prompted the Central Bank of Russia to begin a series of interest rate cuts in early 2014. Since then, the CBR has slashed its benchmark, one-week repo rate from 17% to its current level of 11%. The CBR also expanded the money supply during this period. Although the action was considerable, the results have been marginal as loans to the private sector declined in early 2014 and have been relatively flat since. A slowing global economy caused partially by lower oil prices, added insult to injury. Russia’s oil production has fluctuated, but more recently, it has spiked. Despite this, total exports have been falling. Negative conditions in Russia will likely persist for a while.
Venezuela
Rank by Population: 30th
Rank by Economy: 26th
Although smaller than Russia, Venezuela is much more dependent on oil. In fact, oil revenues account for about 96% of export earnings, 40% of government revenues, and 11% of GDP. To make matters worse, Venezuelan exports have fallen sharply, due to the slowing global economy. Even though this is serious, there is another, more-critical issue emerging. I am referring to Venezuela’s soaring rate of inflation, which currently exceeds 68%. However, Venezuela’s inflation spike is not affecting all items equally. In a CNBC.com article from February 6, 2015, Everett Rosenfeld reported that a pair of Levi’s 501 jeans cost $392 in Caracas, Venezuela compared to $59 in New York. He also wrote that a 40” flat screen TV was $5,889 in Venezuela compared to $426 in The Big Apple AAPL -0.91%. At Brazil’s current rate of inflation, prices would double every 1.33 years. This degree of inflation is an indication of a currency in crisis. Thus far, unemployment has not been very high. However, it did rise from 5.5% this past December (2014) to 7.9% one month later. Venezuela’s benchmark interest rate has been rising steadily since early 2014. Currently at 19.68%, it is below its 23.71% average and much lower than its record high of 83.73% in 2002. Venezuela could be on the verge of a more serious crisis.
Brazil
Rank by Population: 5th
Rank by Economy: 7th
Brazil’s GDP was -2.60% during the past year. It also has the largest economy and population of the infamous four. Because of this, it plays a significant role on the global stage. Brazil has been on the list of the top 10 oil-producing nations three times since 2009. Currently, it is the eighth largest energy consumer in the world. In addition to Brazil’s struggling economy, a corruption scandal has emerged involving Petrobras , the country’s state-controlled oil company, and top officials. More specifically, the threat of impeachment looms large for Brazilian President Dilma Rousseff who has led the country since 2010. One recent survey shows her approval rating at only 8%. Given Brazil’s poor economy, corruption, and low approval for its highest elected official, the situation could easily deteriorate. In short, it might take a while for Brazil to regain the confidence of the rest of the world.
Iraq
Rank by Population: 27th
Rank by Economy: 48th
According to the Central Bank of Iraq, the country’s GDP was 2.40% in 2014 compared to the previous year. This is much lower than its long-term average of 7.71% from 1991 through 2014. Iraq’s most important economic sector is oil extraction, accounting for 55% of the country’s GDP. Thus, lower oil prices have been a negative for this war-torn nation. Even so, as the price of crude has declined, Iraq’s oil production has trended higher. The cost of living for the Iraqi people has been fairly tame since the 2008 crisis, at less than 10%. However, as recently as mid-2006, inflation exceeded 76%. Unemployment has been a problem in Iraq for years. From 2003 to 2013, it averaged more than 18% with a high of 28% in 2003 and a low of 15% in 2012.
Although these four nations account for only 4.6% of total world GDP, the bigger issue is the general slowdown of the global economy. Even though the U.S. economy may be gaining traction, the rest of the world seems to be muddling along and low oil prices have been a significant factor. As long as the current trend persists, demand will likely remain weak and oil inventories will rise, pushing production lower. If so, this would lead to higher unemployment and a further slowdown in economic activity. To borrow the words of a famous Hal David, Burt Bacharach song:
“What the world needs now, is growth, sweet growth.
It’s the only thing, that there’s just, too little of.”
original source: http://www.forbes.com/sites/mikepatton/2015/10/12/the-worlds-four-worst-economies/