According to the World Bank Overview (The World Bank 2012), the bankruptcy of the U.S. financial giant Lehman Brothers in 2008 marked the starting point for the world’s biggest economic crisis since the time of the Big Depression. The effects of the global financial crisis are still experienced by many states and economies, especially by the U.S. and Europe. The crisis has shown several crucial features for global markets. First of all, it was noticed that developed states struggled more than developing countries. Notably, few developed economies, namely Australia, Canada and Singapore, showed the plausible flexibility and positive trends during crisis, whereas some states, like Greece, Portugal, Ireland, Italy and Spain, went down to the merely collapse. Secondly, the financial crisis has revealed that active state’s regulation may lessen the negative effects of crisis, maintain economic stability and adjust unemployment rate. The imperfect nature of market economics provides several motivational reasons for an active role for the state in finance. First of all, state should promote the pure system for every market player to acquire and use information. Second motivation is the ability of the company to sign and enforce contracts within the legal framework. Third, the market transactions should be performed through the comprehensive mechanism, excluding the “dark market”. The great example of such imperfections, where the state should take healing action, are the bankruptcy of a large bank that may evolve to a bank run bankruptcy because of contagious negative moods among creditors and debtors. Generally, the government may guarantee the stability and take some part of risk in order to prevent collapse of the whole system.
The recent European events are showing how the debt predicament was compounded by a constantly growing banking crisis and emerging political instability in the European monetary union. The EU experience serious economic problems, especially the high unemployment rates, which broke the hotline in some countries, and extremely high government debt-to-GDP ratios reaching up to 90% (Citibank 2012). These economic problems pose a hazard to sustainability of the EU as a political unity and leave open chances for few injured-countries for exiting the EU. The mentioned economic problems, namely the high debt, may have negative consequences for the EU countries resulting in sharp investment outflow to more attractive and sustainable zones.
Sources of Data/Methodology
The quality of every report and analysis, including the business or financial reports, depends on the reliability of sources used to perform it. The criteria for choosing the information may be found at the US Departments of Labor Statistics (US Department of Labor n.d.). It names the following characteristics of the reliable information as accuracy, authority, objectivity, currency, and completeness. This financial report is based on the data provided by the articles of the most reputable Australian online sources, namely The Age and The Australian. In addition to those primary sources, the data of the World Bank and City Bank’s monthly analysis, the reports of Capgemini and tradingeconomics.com are used to provide the brief outlook to the latest trends in a global economy. These sources are used in order to provide the reliable and credible data for the report.
The report performs principally qualitative analysis with minor references to quantitative data in order to support the analysis with proper numbers.
Findings
Asia-Pacific home to most millionaires
High net worth individuals (HNWIs) are defined as citizens with ownership of 1million or more USD excluding their primary residence place and luxury things, including the art. The report of Capgemini and RBC Wealth Management (2012) revealed that for the first time in history, the Asia-Pacific region became home to more HNWIs than North America. According to the 2011 data, Asia-Pacific Region had 3,37 million wealthy people, whereas North America was the residence of 3,35 millions. The recent increase happened due to the extreme rise in Japan and China, with Australia taking the third place in the region. This change is mostly caused by the growth in Japan of up to 4.8 per cent and China of 5.2 per cent that are rightly placed among the fastest growing economies in the world. The reasons for high HNWI concentration are also seen in the international capital outflow, and the European crisis.
Spanish jobless rate breaks past 25%, worse to come
The financial crisis that overwhelmed many European countries hit Spanish economy. On Friday, 26th of October, the Spanish government announced the sad fact that the unemployment rate in Spain underwent the 25-per cent line for the first time in modern history. The recent incentives addressed to overcome fiscal deficit, and large debt destroyed thousands of jobs by raised taxes and decreased spending. The market strategist at brokerage IG Markets, Soledad Pellon Bannatyne, suggests that the prognoses of improvement are baseless. She mentioned that the economy needs to show 1,5% growth in order to start generating new jobs, whereas the forecast for the Spanish economy is characterized by 0,5% decline. Therefore, with the current situation and numbers, the economy will continue destroying job places for hundreds Spanish citizens. The official data showed that 5.78 million of people were out of the job market in the July-September quarter, which is 85000 more than the previous quarter’s data.
The government implemented the massive program aiming to reduce unemployment and deficit. Nevertheless, their efforts that included the increase of indirect taxes and capital spending cut resulted in mass street protests and public disapproval.
Ford to cut 5700 jobs across Europe
According to the publication in The Age “Ford to cut 5700 jobs across Europe” dated October 26, 2012, Ford Motors announced about their plans to shut three European plants. This will be the first factory closing in the European region in a decade. By means of this shutdown, the company aims to stem the predicted losses for the two upcoming years in the amount of $US3 billion. The plan includes the closing of two factories in the UK and a plant in Belgium with production capacity for 355,000 vehicles, that equals18% of the Ford’s total production in the region.
Ford is shutting down the UK factories in the middle of 2013 and its plant in Genk, Belgium, in late 2014. With these closings, Ford will eliminate the total of 6200 workplaces for European workers. By now, 500 administrative positions have already been removed. This workforce cut accounts for 13% of its regional employees.
The Belgian-based manufacture of Mondeo sedan, S-Max wagon and Galaxy minivan will move to Valencia, Spain along with the entire cut of 4,340 jobs in Genk.
The pessimistic scenario of shutting down the European production sites is forced by the tremendous shrinking of the European car market. The business strategy includes also the presentation of 15 new models, including the US import of sport Mustang, to European car market.
The Analysis of the Events
The Ford’s decision to close its Belgian plant has a sharp negative impact on Genk’s labour market. Ford Genk was the leading employer in the northeast Flemish region of Belgium near the Dutch border. Whereas the carmaker directly employed 4500 workers at the plant, another 5000 workers among its subcontractors were employed due to Ford’s activity in the broader economy. Of course, the employees feel betrayed and upset as they had work contracts with the large manufacturer till 2020. Generally, Ford’s dismiss from Genk is a regional tragedy as it leaves thousands of people out of the job market. Company understands the potential detrimental effect on Belgian labour market. According to the press release of Statistics Belgium dated 28 October 2011 (Statistics Belgium 2011), the number of unemployed people according to the definitions of the International Labor Office in the Flemish region reached 120,000 in the first half of 2011. With the shutting down the Ford plant and ruining the business activity of contractors, this figure will increase by 7,9% and reach 129,500 unemployed people. In additional to large problem in Genk, Ford entirely ceases the manufacturing of vehicles in the UK, leaving around 1500 people without their work.
The primary reason for the European closure is the decreased demand for the company’s product. In 2007 Ford accounted for a market share of 10.9 per cent in Europe and sold 1.48 million cars, whereas in 2011 the company had only 8.2% of the market selling 1.21 million of vehicles.
The ongoing reaction of the Flemish business leader’s association Volka to the problem was the call to government with a proposal to reduce the labour price in order to make the production more competitive. Generally, this reaction is evident; nonetheless, the conducted analysis reveals other interesting findings. Specifically, manufacturing costs per hour in Germany are 36 Euros, whereas in the UK and Spain are 22 Euro which is lower. Still, German production is left untouched, which leads to the idea, that labour cost is not the primary reason for choosing the plant to close. The chief executive of Ford Europe Stephen Odell mentioned that the primary cause is capacity, as Genk and Southampton are operating at less than half of their maximal capacity, and therefore, the company encounters losses (English 2012).
Whereas Ford’s closure provides inconsistencies and labour market problems on the regional level, the Spanish unemployment rate poses the states and the EU level problem. The unemployment rate in Spain has reached more than 25 percent in the past months. Historically, from 1987 until 2012, the unemployment rate for Spain 16.5% reaching an all time high of 24,63% in June of 2012 and the lowest record of 7,95% in June of 2007. It is evident that the jobless rate showed 300% growth from 2007, and by now, the situation reached its critical level. Usually, the policy-makers are mainly concerned with the long-term unemployment (this type includes people who are in search of job more than a year) and unemployment among young people (individuals aged below 25 years old). Both cases are relevant for Spain, showing the signs of long-term recession and deep economic downfall.
Rising unemployment has severe negative impact on macroeconomic indicators. First and foremost, it means the loss of income for individuals. Secondly, high unemployment gives the increased pressure on state’s budget as far as the state needs allocate more funds on social benefits whereas gets less revenues because of decreased tax revenues.
From an economic point of view, unemployment may be treated as unused labour capacity. Labour demand is a derived demand that means hiring a worker is not valued by its own sake, but is desired because it contributes to the valuable production output (Ashenfelter & Layard 1986). Therefore, the demand for hiring an additional labour unit depends on the Marginal Revenue Product and Marginal Cost of the employee. Current situation in the Spanish market means that employers do not get the appropriate revenue associated with the additional unit of labour and are forced to decrease their economic activity. The Spanish authorities enforced the laws and regulations in order to decrease fiscal deficit, stabilize labour market and support bank recapitalization. The first aid efforts included the increased indirect taxes, cut-offs for the unemployment benefits, decreased wages and cut extras and bonuses in the public sector. These actions found expression in mass protests and public disapproval.
Contrary to the European and US recession, the Asian-Pacific region shows positive dynamics. The 7th annual Asia-Pacific Wealth Report (Capgemini and RBC Wealth Management 2012) highlights trends regarding HNWIs across 10 core markets in Asia-Pacific region: Australia, Hong Kong, Japan, China, India, Indonesia, Singapore, South Korea, Taiwan, and Thailand. The report is concentrated around these countries as they account for 91,5% of regional GDP. The recent findings about the Asia-Pacific topping HNWIs list provide the valuable insight into the recent domination switch in financial markets.
According to the Trading Economics data (see appendix A), the unemployment rate for China is reported at 4,1% in the third quarter of 2012, which is close to the average from 2002 till 2012 of approximately 4,15%. Australia’s unemployment rate was recorded at the level of 5,4% which is less than average. The unemployment rate in Japan showed the positive slowdown trend and dropped from 5% in the late 2010 to 4,1% in the third quarter of 2012. In addition to the low unemployment rates, the mentioned economies show GDP growths. In European Union, only few economies, namely Germany, Austria, Poland, recorded GDP growth, whereas most economies showed decline. Contrary to the EU, the Asian-Pacific region is showing steady growth, creating the vast investment alternative and attractive opportunities for wealthy people and potential investors.
The studies of HNWIs are significant because wealth is one of the key components of the economic system. From the macroeconomic perspective, wealth is a source of finance for future consumption. Wealth accumulation plays an essential role in supporting the retirement and lessening states’ vulnerability to unemployment, natural disasters and epidemics. Generally, this function is more important crucial for countries that have rudimental social care system, than for developed states. In addition, wealth concentration enhances opportunities for the informal sector and entrepreneurship. In this light, the high concentration of HNWIs in economically growing states of Asia-Pacific region, namely China, Hong Kong, India, Singapore and South Korea, is key positive factor in developing the sustainable economy and entrepreneurship possibilities. What is more, taking into account the needs and preferences of HNWIs, the Asian-Pacific region gives excellent opportunities for developing financial markets, especially the insurance, foreign exchange and money markets.
Conclusion
The interpretation of the events in financial markets is the most essential part of the report. Whereas some cases may have regional effect, others have solid global impact on financial markets and stakeholders.
The outlined above closure of Ford Motor’s plants in Belgium and the UK has a negative impact on regional labour markets in the Flemish region and Southampton as far as thousands of work places are destroyed. Further, the states will have to increase government spending on paying unemployment benefits for former workers. Contrary to the negative effects on the regional economy, the shutdown of the three plants will help Ford Motor to decrease the potential losses and improve their market value. Generally, the European crisis is leading to a selloff in Ford shares, which are down more than 32% compared to the previous year. So, closing the European production, Ford Motor tries to mitigate the negative effects of European crisis on their business. In addition to the overall drop in auto demand due to crisis, the demand for Ford’s cars abrupt more than demand for competitors’ cars. Bearing in mind the fact, that Ford shows positive results in the North America where it takes the second position in market share after General Motors, the potential investors should reassess the company’s international potential with an emphasis to the domestic market.
Whereas Ford Motor added a problem to regional labour markets, rising unemployment in Spain gained the national and EU scale. With the fiscal deficit, negative GDP growth, banking problems and inefficient governmental programs to improve the shocking unemployment rate, Spain as a country is losing attractiveness. Investors do not trust in the positive assuring prognoses from the Spanish government which results in high capital outflow from the Spanish financial market. Spain is not the only EU country that experiences deep recession. Greece, Italy, Portugal and Ireland are also in the list of problem EU economies. This picture suggests that the European Union as economical and political unity experiences tremendous shocks and risks losing its sustainable position. Therefore, investors tend to switch their financial interests from the EU countries to the regions with more persuasive numbers.
The growing investment alternative to Europe is the Asian-Pacific region that in 2011, for the first time in history, was proudly named the home for the greatest number of high net worth individuals. In comparison with the negative trends in European economy, the Asian-Pacific region shows positive GDP growth and adequate unemployment rate. The accumulation of wealth in Asian countries is the sign for investors. This means that region needs further development of financial markets, more sophisticated banking and insurance services, and overall, highest demand for production. The switch of attention to fast-growing Asian markets implies innovative opportunities for international business. First of all, the wealthy public requires more sophisticated products and services. Secondly, high GDP growth means additional opportunities for traders at currency markets. Finally, the greatest number of HNWIs in Asian-Pacific is associated with the increased entrepreneur activity, and, consequently, the improved possibilities in capital, commodities and futures financial markets.
