Global economy in worst shape since 2009

WASHINGTON (AP) — Mount­ing fears about Spain’s finan­cial health help illus­trate why the global econ­omy is in its worst shape since 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.

Investors drove up Spain’s bor­row­ing rates Mon­day over con­cern that the government’s debts might force it to seek a bailout. The inter­est rate on Spain’s 10-year bond reached 7.45 per­cent — the high­est since the euro began in 1999. Stocks around the world tum­bled in response.

Wor­ries about Spain inten­si­fied after its cen­tral bank said the econ­omy con­tracted 0.4 per­cent in the sec­ond quar­ter. The gov­ern­ment pre­dicts the econ­omy will keep con­tract­ing next year as tax hikes and spend­ing cuts hurt con­sumers and businesses.

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.

At Jage­mann Stamp­ing Co. in Man­i­towoc, Wis., sales to Europe have dropped more than 10 per­cent from a year ago. The com­pany makes metal parts for auto com­pa­nies and other cus­tomers. It’s still enjoy­ing strong sales in the United States, so it hasn’t had to cut work­ers because of falling busi­ness in Ger­many and the Czech Republic.

“What it does is slow our new hir­ing,” says com­pany pres­i­dent Ralph Hardt.

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.

Amer­i­cans spent less at retail busi­nesses for a third straight month in June, the longest los­ing streak since the reces­sion. Econ­o­mists are down­grad­ing their esti­mates of eco­nomic growth in the April-June quar­ter. When the gov­ern­ment releases its first esti­mate on Fri­day, many think it won’t even match the first quarter’s slug­gish 1.9 per­cent annual pace.

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.

French retail giant Car­refour SA — the Wal-Mart of Europe — says its sales fell in the sec­ond quar­ter amid a slow­down in its core mar­kets in Europe.

Italy’s Fiat lost nearly $260 mil­lion in Europe the first three months of the year. French car­maker PSA Peugeot-Citroen plans to slash 8,000 jobs in France and close a major fac­tory. Europe’s banks are stuck with bad real estate loans and shaky Euro­pean gov­ern­ment bonds.

The Euro­pean Cen­tral Bank has made mas­sive amounts of money avail­able to Europe’s banks at cheap rates to try to revive lend­ing. But bor­row­ing by many busi­nesses and con­sumers remains weak because they are uncer­tain about future income.

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. That’s the longest slow­down in records dat­ing to 1992, accord­ing to Yu Bin, a gov­ern­ment researcher.

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.

“Mis­sion accom­plished,” says Cameron Pea­cock, a mar­ket ana­lyst at Australia’s IG Mar­kets. “China now has the room to re-stimulate its economy.”

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.

“The cur­rent pace of credit growth in Brazil remains unsus­tain­able — and the longer it con­tin­ues, the big­ger the risk of a messy end­ing fur­ther down the line,” Cap­i­tal Eco­nom­ics warned.

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.”

Posted by Randa Wagner on Jul 23 2012. You can follow any responses to this entry through the RSS Feed. Both comments and pings are currently closed.