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December 16, 2011 at 10:01 AM
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.
