As the banking system just threatened to melt down in England and USA, Stratfor figures China, of all places, is most vulnerable, funnily believing that the continental scale PRC economy is actually 'export dependent', as if the locals do not want to upgrade living space by 5 square feet average per capita per annum. Stratfor has been so wrong on China for so long, it is simply entertainment, similar to what CB Ilaine spews out, just as fevered.
Global Market Brief: Major Economies' Recession-Fighting Tools
In a surprise move, the U.S. Federal Reserve lowered the federal funds rate Sept. 18 by half a percentage point to 4.75 percent -- the first such move in more than four years. The unexpectedly deep cut sent a strong message: The Fed has seen indications -- beyond the recent subprime crisis -- that the U.S. economy could be heading into a recession, and it is intending to arrest the economic downturn.
The United States is not the only country facing a slowdown. The Japanese Cabinet Office announced earlier this month that it had revised estimates of Japan's economic growth for the second quarter down from an increase of 0.5 percent to a 1.2 percent contraction at an annualized rate. European statistics released in mid-August revealed low growth rates for Europe's largest economies -- Germany, France and Italy -- along with the slowest growth rates the eurozone has seen since the fourth quarter of 2004.
In short, the world's major economies are looking at a slowdown. The downturn will not be limited to these economies, however. For instance, forecasts released Sept. 17 by the Asian Development Bank predict China will see 11.2 percent gross domestic product (GDP) growth in 2007; however, China's economy depends heavily on exports to the countries now facing economic downturns.
When looking at any potential recession, there are two major questions to ask: How long, and how deep? While there are no clear-cut answers to either of these, policymakers and central bankers in most major economies have a number of tools available to avert a long or deep recession: interest rate adjustments, deficit spending and regulatory reforms.
Economic Tools
The strongest and fastest tool is central banks' ability to cut interest rate targets. Although it is consistently effective and produces the quickest results, lowering rates still takes two or three quarters to benefit these economies. Most central banks drop rates by quarter-points or, at crucial times, half-points. Lower rates are not free, however; they have the secondary impact of weakening a nation's currency, and the growth they spur is inflationary. The restrictions on a country's ability to use lower rates, therefore, are primarily whether the economy can withstand an increase in inflation and, most obvious, how far the bank can reduce rates. As Japan's economy illustrates, when the current interest rate is near zero, there is little a central bank can do.
Economic stimulus is a second, slower-acting tool governments can employ against recessions. A national government can choose to spend money -- usually money it must borrow -- on all sorts of projects in order to stimulate economic activity.
Whether economic stimulus directs money into paving roads, constructing buildings or supporting projects, the end goal is the same: Put money back into people's pockets so that they can, in turn, buy goods and services to boost business and the economy. The chief limit on economic stimulus is the country's current budget deficit. If its deficit is relatively high -- e.g., more than 3 percent -- it can only borrow so much more money before the effect of the deficit begins to counteract the benefits of the stimulus.
Finally, countries can implement regulatory reforms to stimulate growth. However, this process is usually slow and more susceptible to political pressures, and it is often harder to judge the effects. For instance, French President Nicolas Sarkozy has introduced a number of economic reforms, including plans to alter the pension system and ease the current 35-hour workweek law. Neither bill is guaranteed to pass, and even if both were implemented, there is no telling how long it could take before either measure boosted the economy. A jump in productivity would come within a year should France's average workweek change, but it could be years before any changes in the pension system noticeably affected the economy. Every country has its own set of potential regulatory reforms -- it is just a matter of how quickly a government can put them into play.
Given the availability of these tools and the current situation in the world's major economies, the European Union and the United States are in a position to fight recession. Japan, however, will fully depend on the other major players' ability to stimulate global growth and help pull Japan out of recession through export growth. China's economy is also dependent on how well these other countries handle their economic slowdowns.
The United States
The United States has the biggest toolbox. According to the Congressional Budget Office, the U.S. deficit this year is projected to be 1.2 percent of GDP, down from 1.9 percent in 2006. To move from 1.2 percent to a high but manageable 3 percent deficit would mean additional spending (or reduced taxes) of roughly $250 billion. That is an awful lot of economic stimulus available. (For comparison, the post-9/11 stimulus package was "only" $100 billion). Additionally, the Federal Reserve still has plenty of room to drop the federal funds rate from 4.75 percent.
The European Union
The European Union has fewer tools to work with. The European Central Bank has yet to alter its 4 percent interest rate, so that option is on the table, but Europe's interest rate has less room to move than the United States'. Europe's key economies also have some leeway for deficit spending. European Union members are technically allowed deficit spending of 3 percent of GDP under the Maastricht Treaty, although the regulations have not always been strictly observed. Germany has predicted that its budget deficit might shrink to between 0.1 percent and 0.2 percent of GDP in 2007, giving Berlin plenty of legroom should the government need to inject extra euros into the economy. France and the United Kingdom do not have that much space for deficit spending, however; France expects a budget deficit of 2.4 percent of GDP this year, while the United Kingdom has just managed to lower its 2005-2006 budget deficit of 3.2 percent of GDP to 2.7 percent for 2006-2007.
Another area where Europe might be able to spur economic growth is regulatory reform -- particularly in France and Germany, where Sarkozy and German Chancellor Angela Merkel enjoy high popularity ratings and agreeable parliaments, and have strong economic plans for their countries. However, Europe faces an institutional limitation that the United States is free of: While the United States has a single federal reserve and legislative system, the European Union has 27 different economies and 27 different sets of decision-makers (in addition to the transnational EU bureaucracy). The United States, even politically hamstrung by Iraq, can still debate and implement change faster than Europe.
Japan
Japan is in a bind. It never really recovered from its 1989 economic collapse and has been using low interest rates and deficit spending for so long that these tools are needed simply to keep basic economic activity going; interest rates are at 0.5 percent, and the budget deficit is 6.5 percent of GDP. Interest rate cuts from 0.5 percent and more deficit spending would have negligible effects at best. Additionally, Japan is not likely to focus on major economic regulatory reforms anytime soon; with Prime Minister Shinzo Abe's Sept. 12 resignation, the Japanese government has other things to worry about. This means that a Japanese recovery largely depends on strong growth in the country's major trading partners -- two of which are now flirting with recession.
China
In China, growth rates regularly top 10 percent annually. But this growth is not healthy, as it is predicated on throughput and exports, not profit and local demand. As global growth slows, demand for Chinese goods likely will stagnate. Put simply, since Chinese growth is export-led, it cannot trigger resurgences elsewhere.
The most important economies in the world are staring recession in the face, but the United States and the largest EU economies have enough tools to put up a good fight. The stakes in this struggle are high for every country -- especially for China and resource-exporting countries that have not built cash reserves during the three-year bull market in commodities. Still, as long as there are no external shocks, such as another Katrina/Rita-like hit to a major part of the economy or a massive string of bank failures in Europe, this recession looks more like 2002 than 1982.
Still, the greatest risk in this recession comes from China, whose economy grows more vulnerable every quarter that this slowdown lasts. China exports more than $1 trillion worth of goods annually; its inexpensive goods help keep inflation modest in industrialized countries, and its productivity keeps major corporations profitable. There already are signs of capital flight from China, and the economy is overloaded with nonperforming loans. Six percent inflation is causing Beijing concerns about social unrest. If exports to the United States and Europe fall too far or for too long, the fragile Chinese economy could break. With that, any recovery in the rest of the world would be shattered and a prolonged global recession likely would ensue.
If China holds on despite a long or particularly deep recession, the economies of South America and sub-Saharan Africa likely will be the biggest losers. Most of these economies also are export-driven, but their exports are commodities: metals, oil and natural gas. For those who have not saved money -- or worse, who have gone further into debt, as Venezuela has -- a prolonged recession will be particularly damaging.
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