Slower global growth reflects close economic links
By Paul Wiseman, AP, Jul 22, 2012
WASHINGTON (AP)--The global economy is in the worst shape since the dark days of 2009.
Six of the 17 countries that use the euro currency are in recession. The U.S. economy is struggling again. And the economic superstars of the developing world--China, India and Brazil--are in no position to come to the rescue. They're slowing, too.
The lengthening shadow over the world's economy illustrates one of the consequences of globalization: There's nowhere to hide.
Economies around the world have never been so tightly linked--which means that as one region weakens, others do, too. That's why Europe's slowdown is hurting factories in China. And why those Chinese factories are buying less iron ore from Brazil.
As a result of this global economic slowdown, the International Monetary Fund has reduced its forecast for world growth this year to 3.5 percent, the slowest since a 0.6 percent drop in 2009. Some economists predict the global economy will grow a full percentage point less.
For now, few foresee another global recession. Central banks in China, Britain, Brazil, South Korea and Europe have cut interest rates in the past month to try to jolt growth. European leaders have begun to focus more on promoting growth, not just shrinking debt and cutting budgets.
The Chinese government, in particular, is expected to do what it takes to protect its economy from deteriorating too quickly. And despite their slowdowns, China and India are still growing at rates America and Europe can only imagine.
But many economists say European policymakers aren't moving fast enough to strengthen European banks and ease borrowing costs for Italy and Spain. They fear the global impact if Europe's economy deteriorates further.
Stock prices in the United States and elsewhere are fluctuating almost daily depending on the outlook for a resolution of Europe's debt crisis.
Around the world, sales at companies ranging from automakers to technology companies are falling. Advanced Micro Devices, a California-based maker of computer chips used in everything from slot machines to smart cameras, says revenue likely dropped 11 percent in the second quarter because of weaker-than-expected sales in China and Europe.
One growing concern about the global economy is there's little margin for error: Unemployment is already at recession levels in Europe and the United States.
The United States, by far the world's biggest economy, has long pulled the global economy out of slumps. Now it needs help. Three years after the Great Recession officially ended, the American economy can't maintain momentum. For the third straight year, growth has stalled at mid-year after getting off to a promising start.
Unemployment stood at 8.2 percent in June--the 41st straight month it's been above 8 percent.
The global slowdown is squeezing U.S. exports, which have accounted for an unusually large 43 percent share of U.S. growth since the recession officially ended in June 2009.
Consumer confidence has fallen four straight months in the face of scant hiring and weak economic growth. U.S. companies are nervous about the threat of tax increases and spending cuts that are scheduled to kick in at year's end unless Congress breaks a deadlock. The IMF has warned of a spillover to the rest of the world if the U.S. economy falls off the so-called fiscal cliff.
Europe's obstacles are even more severe. It's faced with crushing government debts, struggling banks and scant economic growth. Unemployment in the 17 countries that use the euro is 11 percent, the highest since the euro was adopted in 1999.
Greece, Portugal, Italy and Spain are in recessions. Germany and France are faring better, but both are likely to grow more slowly this year than America.
Many fear that Greece and perhaps other countries will default on their debts and have to abandon the euro currency, which could ignite financial chaos across Europe.
A summit of European leaders last month produced some agreements that helped calm markets for a few days. But optimism faded as investors recognized that governments are still saddled with big debts and banks with bad loans. And that Europe itself still faces the threat that growth will stall and the euro currency alliance will collapse.
The European Commission predicts the 17-country eurozone economy will shrink 0.3 percent this year. Many economists fear it could be worse. Capital Economics says a recent drop in eurozone business confidence is consistent with a 1 percent decline in economic output.
In the latest wallop to the global economy, China said last week that its economic growth fell to a three-year low. The world's second-largest economy grew 7.6 percent in the April-June quarter compared with the same quarter last year. That was the slowest growth since early 2009.
Countries like China need fast growth to serve growing populations and millions of people leaving farms to seek work in cities.
Chinese growth has decelerated for eight straight quarters. The slowdown is partly deliberate. In 2010 and 2011, Chinese officials raised interest rates and took other steps to tame inflation and cool an overheated real estate market.
But China is also feeling Europe's economic squeeze. Chinese exports to Italy dropped 24 percent in June from a year earlier. Exports to France fell 5 percent, those to Germany nearly 4 percent. Europe buys about 17 percent of China's exports.
The impact of weak European demand for Chinese-made furniture, shoes, toys and other goods has fallen hardest on export-oriented manufacturers along China's southeastern coast. Some companies have closed. Others are cutting staff.
China is the biggest trading partner of Brazil, which has the world's eighth-biggest economy. Brazil is likely to grow only 1.8 percent in 2012, according to Sao Paulo Federation of Industries. China's slowdown has reduced demand for Brazilian soy and iron ore. Brazilian manufacturers, such as aircraft maker Embraer, are hurting as Europe reduces its demand for manufactured goods.
A relatively strong currency isn't helping. It makes Brazilian products more expensive to foreign buyers.
Brazil also has a U.S.-style problem with consumer debt: Since 2003, about 40 million Brazilians have entered the middle class and brought a strong appetite for consumption. Brazilian leaders credited those consumers with invigorating the economy in recent years and helping protect it from external shocks.
But most of the buying has been on credit. And those bills are adding up. In a report last week, London-based Capital Economics estimated that debt payments now eat up 20 percent of household income in Brazil.
Similarly, the outlook has dimmed for India, the world's fourth-biggest economy. Its growth slowed to a 5.3 percent annual rate in the first three months of 2012, the slowest rate in nine years.
Over the past two decades, India has emerged as a powerhouse in services--writing software, running call centers, making movies, drafting engineering plans.
In a report last month, Andrew Kenningham, senior global economist at Capital Economics, said India's troubles are mostly self-inflicted.
"Weak governance, although not new, is the most plausible explanation for the slowdown," he wrote.
The government has reneged on promises to make it easier for foreigners to invest in India. It has taxed Indian firms that acquire companies overseas. Indian factories have cut production. And the pay of many Indians has been diminished by inflation, which has averaged more than 9 percent a year for the past two years.
The slowdown in the developing world could make it harder for the economies of Europe and the United States to climb out of their ruts. And the weaker the rich countries get, the harder it will be for developing economies to regain their old fast pace.
"In today's interconnected world, we can no longer afford to look only at what goes on within our national borders," IMF Managing Director Christine Lagarde said earlier this month. "This crisis does not recognize borders. This crisis is knocking at all our doors."
