Canadian Manufacturing

Grim global prospects haunt economies big and small

Interconected, globalized economies mean there's nowhere to hide from the downturn



WASHINGTON— The lengthening shadow over the world’s economy illustrates one of the consequences of globalization: There’s nowhere to hide.

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.

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.

The International Monetary Fund has reduced its forecast for world growth this year to 3.5 per cent, the slowest since a 0.6 per cent drop in 2009. Some economists predict the global economy will grow just 2.5 per cent.

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.

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.

Around the world, sales are falling and there’s little margin for error: unemployment is already at recession levels in Europe and the U.S., where the world’s biggest economy—which has long pulled the global economy out of slumps—now 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 per cent in June—the 41st straight month it’s been above 8 per cent.

Economists are downgrading 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 per cent annual pace.

The global slowdown is squeezing U.S. exports, which have accounted for an unusually large 43 per cent share of U.S. growth since the recession officially ended in June 2009.

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. Faced with crushing government debts, struggling banks and scant economic growth, unemployment in the 17 countries that use the euro is 11 per cent, 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 post growth below 2 per cent.

The European Commission predicts the 17-country eurozone economy will shrink 0.3 per cent this year, but many economists are predicting a bigger drop.

BRIC slowing too

In the latest wallop to the global economy, China’s economic growth fell to a three-year low. The world’s second-largest economy grew 7.6 per cent in the April-June quarter—the slowest growth since early 2009.

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.

But China is also feeling Europe’s economic squeeze: exports to Italy dropped 24 per cent in June from a year earlier. Exports to France fell 5 per cent, those to Germany nearly 4 per cent. Europe buys about 17 per cent of China’s exports.

China is the biggest trading partner of Brazil, which has the world’s eighth-biggest economy. Brazil is likely to grow only 1.8 per cent 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.

The outlook has also dimmed for India, the world’s fourth-biggest economy. Its growth slowed to a 5.3 per cent annual rate in the first three months of 2012, the slowest rate in nine years.

The slowdown in the developing world could make it harder for the economies of Europe and the U.S. to climb out of their ruts. And the weaker these rich countries get, the harder it will be for developing economies to retain there fast growth.

Associated Press Staff Writers Bradley Brooks in Rio de Janeiro, David McHugh in Frankfurt and Joe McDonald in Beijing contributed to this report.

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