Is the Global Economy Rolling Over?

world global economy
world global economy

That global money managers are the most bullish since April adds a contrarian flourish to what may be a grim reality: it looks like the global economy is rolling over into stagnation or even recession. The evidence is piling up from all corners of the globe.

The GDP of the16-nation eurozone slipped to 0.4% in the third quarter, down significantly from the second quarter's pace of 1%. Exporting powerhouse Germany managed a tepid 0.7% growth rate, slipping from the second quarter's healthy 2.3% rise.

The economy of Greece actually contracted by 1.1% in the third quarter as austerity took its toll, and the large (and heavily indebted) economies of Spain and Italy were essentially flat.

In a new and troubling twist on the eurozone bailout of Greece, Austria has recently refused to make a scheduled debt payment on behalf of Greece, claiming that the Greeks failed to meet its austerity and spending targets. The source of Austria's ire is a new report from the European Union statistics agency, Eurostat, that Greece's deficit is 15.4% of gross domestic product, significantly higher than the previous estimate of a 13.6%, and it's public debt is 126.8%, well above the 115.1% of GDP which Eurostat has estimated as recently as April.

Ireland's banking losses have evolved into a sovereign debt crisis as that nation's government absorbed massive bank losses. Now Portugal is warning that the Irish debt problem may trigger a contagion that will spread throughout Europe as investors demand much higher bond rates on the sovereign debt of other at-risk nations.

Although officials continue to reassure investors that the situation is under control, some analysts are going so far as to suggest that these interlocking debt crises could pull the European Union apart.

China Tightens Credit and Speculation

In Asia, Japan managed weak growth in the third quarter but the Japanese government has downgraded its assessment of the economy for the first time since February 2009 as export growth slowed in the third quarter on weaker demand in Asia for Japanese goods and the stronger yen crimped export earnings. At least one Japan-based economist is already forecasting that Japan's GDP will contract in the fourth quarter-another way of predicting that Japan is slipping back into recession.

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China has been almost universally regarded as the engine pulling the global economy out of recession since 2008, but rapidly rising food prices and signs of asset bubbles in commodities and real estate have caused the central government to tighten lending.

If the result is a slowing economy -- which is precisely the goal of the government's tightening -- then global commodity and stock markets which have priced in skyrocketing growth in China will soon feel a bit like Wiley E. Coyote: having run off the cliff, there is nothing below but air.

China's Shanghai index led the decline by tumbling 4%, a move that was mirrored by markets around the world. Chinese authorities stuck another pin in the global market's balloon by announcing restrictions on foreign ownership of real estate. The goal of the policy is to restrict the so-called "hot money" pouring into China in invest in the white-hot property market.

To tackle rampant food inflation that is ravaging the purchasing power of low and middle-income Chinese households, China has also announced price controls. Food prices have leaped over 10% in a year, and many believe this understates the true increase.

Longer term, China's policy of favoring local industry with heavily subsidized loans and no-bid government contracts -- what economists call "state capitalism" -- is creating conflict with other nations who seek a slice of China's growing economy. China's favoritism and explicit industrial policy of advancing local technology and production at the expense of global competitors has the potential to spark a trade war.

And as if the rising threat of global trade wars isn't negative enough, the potential for a damaging series of currency wars is also increasing as many major trading powers push back against the Federal Reserve's implicit attempt to devalue the U.S. dollar with its quantitative easing policy.

U.S. Showing Signs of Slowing

Despite the modest rise in retail sales reported this week (a bump largely caused by auto sales), there are unmistakable signs of slowing in the $14.7 trillion U.S. economy as well.

The Empire State Manufacturing Survey released yesterday reflected an unexpected decline in general business conditions and new orders, both of which fell below zero for the first time since mid-2009.

The number of homeowners who are underwater on their mortgages (that is, owe more than the house is worth) is still surging, and home prices declined in about half of all U.S. metro areas. Such negative news in housing undercuts the entire "recovery" story about the U.S. economy.

Even the jobs report issued last week, proclaiming that the economy generated 151,000 new jobs is suspect. The household survey -- another measure of employment -- registered a decline of 330,000. In addition, Stephanie Pomboy of MacroMavens analyzed the report's "seasonal adjustments" and found that the "upside surprise" of 100,000 jobs was created out of thin air. That suggests the actual jobs created was more on the order of a meager 50,000 rather than 150,000

In a global economy in which every nation wants to grow by exporting to others, then the weaknesses in Asia, Europe and the U.S. will reinforce each other as the regions stagnate or drop back into recession.

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