Is the global economy just teetering or is it cratering? The U.S. economy has been making modest but steady gains, but hazards in Europe, China and emerging markets have the potential to put that progress in check.
U.S. consumer sentiment has been notably up, household debt ratios have fallen to 1994 levels, inflation is starting to recede and, while unemployment remains stubbornly high, the fear of further job losses seems to have dissipated.
While the status quo is far from ideal, the snail’s pace progress together with the molasses-like GDP growth rate of about 2% seems nearly acceptable in a global economy that seems to be unraveling. Most of the headlines have focused on European disunion, where the leaders never seem to be able to get ahead of a crisis that has spread from Greece to Ireland to Portugal and in 2011 to Spain, Italy and Belgium. What’s more, the vulnerability of French and German banks to toxic sovereign debt and the looming threat to France’s triple-A debt status has already shrunken Europe’s solid core to a Germany governed by a wobbly coalition.
While it is impossible to say what precisely will happen in Europe, it seems reasonable to suppose that Greece and Ireland, the first two economies to go down, point the way. Both are experiencing negative GDP growth. The European Central Bank (ECB) itself, which has every reason to downplay bad news, is forecasting a Eurozone contraction while imploring its member states to make long-delayed structural reforms. It is not inconceivable that the ECB, like Europe’s politicians, is just playing for time with mild statements aimed at maintaining the current level of foreign investment. The Eurozone does not have a good track record in accomplishing sustained structural reforms.
A European implosion in 2012 could damage the United States’ surging export market, one of the U.S. economy’s bright spots. A Milken Institute economist projects that a Eurozone recession triggering a 10% decline in U.S. exports to the region would result in a manageable 2% decline in U.S. exports and a 0.2% hit to U.S. GDP growth. But that projection is based on a mere recession. A cratering of the European economy following a full-fledged banking crisis would naturally have a correspondingly greater effect. Such a crisis seems within the realm of possibility in 2012.
Perhaps a bigger potential hazard for the still fragile U.S. economy involves China. Economists have long debated not so much whether its credit bubble will pop but how hard. Writing this week in the London’s Telegraph, Ambrose Evans-Pritchard, the journal’s international business editor, makes the case that China’s hard landing has already begun. Despite all the double-digit dreams investors have had about China in recent years, its Shanghai stock market has already registered nightmarish returns since its 2008 peak, losing 60%. That matches Wall Street’s Great Depression crash from 1929 to 1933—in one fewer year. And half of that loss has occurred in the past half year.
Evans-Pritchard cites an IMF economist who says loans in China’s credit-bubble economy have grown to 200% of GDP. Compare that to the 50% of GDP level that occurred prior to the bursting of the U.S. housing bubble, or the 50% level that preceded Japan’s late ’80s Nikkei bubble, from which Japan has never fully recovered. That level of debt is starting to adversely affect the Chinese property market—with prices as much as 70% lower in outlying areas and 25% down, reportedly, in one Shanghai development. Chinese official figures report a mere 0.3% decline, but Evans-Pritchard calls this a lagging indicator.
As pain spreads throughout China and double-digit GDP growth begins to contract, China is likely to cease its recent role as the world’s shock absorber as it endeavors to contain its own shocks. The U.S. has been pressuring China for years to allow its currency to appreciate, which it has been doing very slowly. But it is entirely foreseeable that China will now work to devalue its currency, which will cut into U.S. exports and shave off some U.S. GDP growth. (China is now America’s third largest trading partner, after Canada and Mexico.)
Indeed, China’s announcement Wednesday that it would impose anti-dumping duties as high as 12.9% on GM, Chrysler and other U.S.-made autos, following the imposition in 2009 of U.S. duties of as much as 35% on Chinese car and light-truck tires, may signal a run-up of trade wars that will be destructive to each nation’s economy.
A Chinese hard landing is also bound to adversely affect fast-growing emerging economies, many of whose economies have expanded through increased trade with China.
U.S. investors have cheered positive U.S. economic data with a post-Thanksgiving stock market rally. But already visible perils in two of the world’s major economic centers would seem to have more power to drag down the American economy than a still fragile U.S. has to lift an interdependent global economy.