The U.S. economy is already facing some pretty heavy headwinds, including the near-term threat of a slowing recovery and the long-term burden of government debt.
Now, slowing global growth looms as well. It will shave at least 0.2 percentage points off U.S. growth in 2011 and twice that much if Europe goes off the rails. Though a U.S. recession is still the weaker bet, the combination of domestic woes plus slower emerging-market growth and European troubles threatens something close to the perfect storm.
In Europe, the debt menace is growing. For now, bond buying by the EU central bank is containing interest rates for the sovereign debt of Italy and Spain — the latest, and so far the largest, victims of Europe’s fiscal flu. Worries about contagion are dampening growth in Germany, an economy driven by exports to its euro zone neighbors. They’re also pushing France to tackle its fiscal flab by trying to quickly trim public spending to avert a crisis.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Legitimate anxiety about bank write-downs will continue to rattle stock markets, both in Europe and the U.S. Worry about the need for more bailouts is also on the rise, fueling anti-euro sentiment among European nations. EU officials say they’re committed to the currency, but investors fret about the cost of saving it if Italy or Spain needs a bailout.
At the same time, superfast growth in emerging markets is moderating. Some countries are tapping the brakes in a calculated effort to temper inflation and dampen speculation in real estate and other assets. In China, for example, where inflation hit 6.5% (annualized) in July, officials have upped the minimum requirements for bank reserves 12 times since 2010. Similarly, South Korea tightened rules on stock trading and raised interest rates earlier this year. And in April, Brazil imposed a 3% tax on bank lending.
Governments are also cinching in public spending, hewing to budgets that are more austere. Brazil intends to trim $32 billion from its government spending — about 5%. India aims to cut its budget deficit to 4.6% of its GDP, which is less than half the expected U.S. rate. The lackluster U.S. and European economies will also sap demand for imports, cutting into emerging economies’ foreign sales. In July, factory growth in China, for example, contracted for the first time in a year.
A slowdown in emerging economies is particularly critical, because those nations have been the engine of global gains since the 2008 financial crisis laid low the world’s richer nations. Developing countries will provide about two–fifths of the upward impetus in 2011. In contrast, that group accounted for just one-fifth of world growth a generation ago.
Figure overall world economic growth will slow to about 3.8% this year — down from 5% last year and half a percentage point lower than expected earlier in 2011. That relaxed pace will bite into American exports. Based on the U.S. share of global exports, the slowdown means a loss of about $27 billion from GDP this year. With only a 2% gain in U.S. GDP likely, the loss of that output will be felt.
Still, barring yet another storm, we continue to expect the U.S. to avoid recession.
-
What Is a Qualified Charitable Distribution (QCD)?Tax Breaks A QCD can lower your tax bill while meeting your charitable giving goals in retirement. Here’s how.
-
Embracing Generative AI for Financial SuccessGenerative AI has the potential to reshape how we approach learning about and managing our personal finances.
-
Europe Faces Economic and Political Headwinds Next YearThe Letter Challenges for Europe: Potential tariffs, high energy prices and more competition from China will weigh on the bloc in 2025.
-
Don't Sleep on Japan's Economic TransformationThe Letter After almost three lost decades, Japan — one of the world's biggest economies — is finally showing signs of life.
-
Kiplinger Outlook: Telecom Companies Brace for Tough TimesThe Letter The telecom industry is entering a new era that threatens profitability. But the coming Trump administration will make it easier for the major players to adjust.
-
Start-ups Trying to (Profitably) Solve the World’s Hardest ProblemsThe Letter More investors are interested in companies working on breakthrough science to tackle huge societal challenges. The field of deep tech has major tailwinds, too.
-
The Big Questions for AR’s FutureThe Letter As Meta shows off a flashy AR prototype, Microsoft quietly stops supporting its own AR headset. The two companies highlight the promise and peril of AR.
-
China's Economy Faces Darkening OutlookThe Letter What the slowdown in China means for U.S. businesses.
-
AI Start-ups Keep Scoring Huge SumsThe Kiplinger Letter Investors continue to make bigger bets on artificial intelligence start-ups, even for small teams with no revenue. Some backers think a startling tech breakthrough is near.
-
Should We Worry About the Slowing U.S. EconomyThe Letter With the labor market cooling off and financial markets turning jittery, just how healthy is the economy right now?
