Recession, debt, deflation: mounting threats facing the global economy
Only the US and Britain are growing at decent rates.
LONDON — The global economy’s problems seem to be multiplying.
Hours after the leaders of the world’s 20 most developed economies sought to boost confidence by promising to increase global output by $2 trillion over five years, Japan said it had fallen into recession.
That leaves the country – the world’s third-largest economy – on a long and growing list of troubled economies. China is slowing as well, and Europe can’t seem to take off.
Among major economies, only the US and Britain are growing at decent rates, and how long that lasts depends on how much trouble their trading partners are in.
British Prime Minister David Cameron warned in an opinion piece in the Guardian newspaper on Monday that the “red warning lights are flashing” for the world economy.
Japan’s Prime Minister Shinzo Abe had pledged to end two decades of stagnation with a strategy dubbed “Abenomics” that included big economic reforms and stimulus. But the economy contracted at an annual pace of 1.6% in the third quarter after housing and business investment dropped following a sales tax increase.
The contraction came despite predictions the economy would rebound from a drop in the previous three months.
Consumer spending is faltering as the population shrinks and grows older. Household incomes peaked more than a decade ago, and workers are increasingly having trouble making ends meet with part-time or contract work.
Manufacturers, meanwhile, have lost their leading edge in innovation while shifting production to cheaper locations offshore.
Japan’s weakness could hinder growth elsewhere if its companies cut investment and buy fewer imports such as machinery, electronics and raw materials. The island nation is one of the world’s biggest importers of food and the third-biggest buyer of natural gas.
Growth in China, a manufacturing giant, is slowing – from 10.4% in 2010 to an estimated 7.5% this year. Explosive growth in China has been one of the primary drivers of the world economy for the past decade, so its slowdown is having ripple effects.
The question for Chinese leaders is how to let the country’s economy slow to more sustainable growth rates without having a “crash landing.” The government is trying to boost domestic spending while easing off its dependence on trade and state-sponsored investment.
Because China has strong trade links to the West, a slowdown would do some damage to the US and Europe. Its massive manufacturing sector is a big consumer of raw materials, so weaker growth would particularly hurt commodity-producing countries like Australia and Brazil.
China’s slowdown from high rates is echoed in many other emerging markets, such as India and Brazil.
Many of these countries have benefited for years from a steady flow of investment from developed economies. Because interest rates have been at record lows in the US and Europe, many investors there have sought higher yields in emerging markets, where interest rates are higher.
That is changing, however. The US Federal Reserve is considering raising interest rates, which will entice some investors to keep their money in the US – or withdraw it from emerging markets.
That flow of money back to the US can create huge turbulence in markets. It was behind sharp drops in emerging markets and currencies in February, for example.
The economy of the 18-country European Union has been struggling to grow since it emerged from recession last year. It expanded by a mere 0.2% in the third quarter from the previous three-month period.
Its problems are compounded by the threat of deflation – when prices fall. A sustained drop would hurt growth by encouraging people to delay purchases in hopes of better deals later on.
Government debt, meanwhile, remains high among large economies like France, Italy and Britain. That means they will have to limit spending for years, potentially stymieing growth.
The conflict in Ukraine is also raising uncertainty, leading to sanctions between Russia and the US and European Union. The impact has been visible in a drop in factory orders and business confidence in Germany.
The eurozone’s combined $13 billion economy is the world’s second-biggest, trailing only the US, meaning its problems cast a pall over the global economy.
© 2014 The Canadian Press