The Recession Felt Around the World
In an era of globalization, no country is immune when the United States falls onto hard times. Here’s a look at how economies elsewhere will fare.
Mexico and Canada: Living next door to worlds biggest economy has its advantages, but it has big drawbacks, too. Exports to the United States represent about a quarter of each countrys GDP, so direct trade links will bear the brunt of a slowdown. Expect the manufacturing sectors of both countries to feel the pinch.
China: The worlds fastest-growing economy cant help but be affected when the worlds largest economy slows down, since China relies on exports to the United States as one of its main sources of growth. In recent years, China has boasted double-digit growth. Officially, Chinese economists expect growth to slow down to 9 percent in the wake of a U.S. recession, but only if such a recession is mild, lasting two quarters. If the U.S. recession is severefour quarters or moreand is centered on a faltering U.S. consumer who buys fewer Chinese goods, then Chinas growth is likely to slow to 6 or 7 percent, a hard landing, indeed.
Indonesia, Malaysia, Taiwan, and South Korea: China gets raw materials such as timber and rubber from Southeast Asian countries like Indonesia and Malaysia. Other East Asian countries, like Taiwan and South Korea, send component parts to the mainland, which are then assembled into finished products that are shipped to the United States. Both groups of exporters are likely to falland fall hardif a drop in Chinese exports to the United States leads to less Chinese demand for these goods and raw materials throughout Asia. Keep an eye on metals, coal, and food products in particular.
Latin America: Chiles got copper; Brazils got minerals; Argentinas got livestock and feed. Theyll have to scrounge to sell these and other commodities elsewhere if the United States and China isnt buying as much as before. Prices of commodities could fall by 20 to 30 percent in a U.S. recession followed by a sharp economic slowdown.
Estonia, Latvia, Lithuania, Hungary, Bulgaria, Romania: They all run large deficits, are experiencing excessive credit booms and housing bubbles, and have an overvalued currency. If capital dries up because of the global credit crunch, it could lead to deep financial woes for these smaller European economies: Households that borrowed Swiss francs or Euros to finance their mortgages could go bankrupt and, in turn, local banks could go belly up.
Britain, France, and Germany: As a recession in the United States takes hold, the fall in U.S. demand will mean lower exports by European companies, as well as lower sales and profits for European firmssuch as BMW, Unilever, and othersthat produce everything from cars to consumer products in the United States. A weaker dollar means that the valuein eurosof European investments in the United States will suffer a major capital loss. High oil prices wont help, either. And the deflation of housing bubbles in Britain, France, Spain, and elsewhere will slow down growth across the continent.
Japan: The Japanese economy is perpetually anemic, always on the borderline between growth and recession, between inflation and deflation. A deep U.S. recession will likely tip Japan over the edge, and into a recession of its own. Most of Japans economic growth in the last few years has been driven by external demand for its goods (such as consumer electronics, cars, etc.), net exports with a weak yen. Domestic private consumption has been weak, as incomes and wage growth have remained flat. And, as one of the worlds largest energy importers, oil hovering at $100 a barrel will make it hard for Tokyo to shake off its economic malaise any time soon.
And a Few Winners:
The United States: Ironically, some parts of the U.S. economy will be the biggest winner. For example, a weaker dollar means that the export competitiveness of American trade partners will be reduced while U.S. competitiveness will receive a boost. American firms will benefit from more exports to the rest of the world. Sharply lower home prices are bad news for current home owners but good news to those renters who will now find buying a house more affordable.
Importers in Europe, Japan, and China: A U.S. recession and global economic slowdown will eventually lead to a sharp fall in the price of oil, energy, and other commodities. So expect the heavy importers in these areasparticularly Europe, Japan, and Chinato find a silver lining amidst the storm.
European Shoppers: American goods may have never been so cheap for people with euros in their pockets. If you have visited New York City recently, you may have noticed the swarm of European tourists hunting for bargains from a weak dollar. Expect these European crowds to grow even larger as the savings on luxury goods, clothes, and shoes climbs higher and higher. It may also put a smile on the face of a few American retailers, too.
More from Foreign Policy
No, the World Is Not Multipolar
The idea of emerging power centers is popular but wrong—and could lead to serious policy mistakes.
America Prepares for a Pacific War With China It Doesn’t Want
Embedded with U.S. forces in the Pacific, I saw the dilemmas of deterrence firsthand.
America Can’t Stop China’s Rise
And it should stop trying.
The Morality of Ukraine’s War Is Very Murky
The ethical calculations are less clear than you might think.