Road Warrior

Global Synchronized Slowdown

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If you have heard me speak or have followed my columns in recent years, you know I have discussed the great super cycle and how it brought prosperity to agriculture and rural America. On the other hand, the remainder of the economy outside of rural America, which represents 260 out of 320 million people, has seen wealth destruction in the form of stock and real estate decline, along with household income declines of 13% on average.

The prospects of agriculture and rural America are tied to the global economy with the emerging nations, that is, the BRICS and KIMT blocs, which include Brazil, Russia, India, China and South Africa, as well as South Korea, Indonesia, Mexico and Turkey. The global economy is definitely in the midst of an economic slowdown that is synchronized and interconnected.

There are three major fronts in this economic event. First, the European economy, which represents 26% of the world economy, is struggling economically and politically. The economic concerns are the high level of debt service, along with economic policy that, in some cases, stifles entrepreneurship, business creation and growth. Next year's elections in Germany will foretell the ultimate direction of the Eurozone. Angela Merkel, the Chancellor of Germany, will be fighting for her political life because of her efforts to hold the Eurozone together.

China is a second front. China's trade fortunes are tied closely with the economic health of Europe. Reduced demand for consumer goods from that region and the U.S. is slowing the Chinese economy back down to rates of economic growth not seen in recent decades. The key in China will be to stimulate spending domestically by its citizens and others in the Asian and ASEAN regions. This is very unlikely given the historically high savings rates in the region. China is a key importer of agricultural and energy products. So goes China, so goes U.S. agriculture and rural America.

The final front is here in the U.S. The uncertainty in fiscal policy, taxes, health care and regulations have American businesses in a cautious investment mode. Next year could be interesting. The imbalances in the federal budget and growing debt are on an unsustainable pathway, which will require dramatic action to avoid an economic heart attack.

While the global economic status sounds dire, which it should, strong businesses with sound business acumen can still thrive in this environment. It will take management teams that think globally, but implement strategy on the local level.

 

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

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on Sep 5, 2012

Will there be additional consolidation in the banking business? Tight margins are here to stay and the risk tolerance being what it is, bankers will be chasing the same credits.

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Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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