Economic Signals Heighten Worries of a Double-Dip
By SUDEEP REDDY And BEN CASSELMAN Is the world heading for another recession?
Fresh data Thursday pointed to a decline in manufacturing activity in both China—a critical engine of the global recovery—and Europe, a sign businesses are bracing for slower growth.
Compounding the concern is the political paralysis in Europe and the U.S., where rival parties are divided on how to respond to the crisis.
In Europe, policy makers struggling with the Continent's debt woes are trying to reassure investors that European banks can weather the storm.
Officials from the Group of 20 economies said Thursday night that they would aim to preserve banking stability and markets. The statement, which wasn't expected but came after a day of market turmoil, also offered the first joint commitment that Europeans would seek to "maximize" the impact of their rescue fund. U.S. officials have urged European policy makers in recent weeks to leverage the bailout fund—essentially borrowing against it—to make more money available to solve Europe's ills.
IMF Chief Christine Lagarde said advanced countries need to prioritize balancing their budgets, while the World Bank's President Robert Zoellick warned that an economic crisis in the developed world could spread to developing countries. Both spoke at the IMF headquarters in D.C. Thursday. (Video: AFP, Photo: Getty images)
In the U.S., Congress is again riven over funding the government, just weeks after the summer's debt-ceiling debate led to a downgrade of Treasury debt.
The risk remains that another shock—such as deeper turmoil in the European banking sector—could be one too many for the world economy.
Forecasters polled by The Wall Street Journal this month gave a one-in-three chance to the U.S. slipping into recession over the next year.
"The world is in a danger zone," said World Bank President Robert Zoellick. His confidence in major economies avoiding another recession, he said, was "being eroded daily by the steady drip of difficult economic news."
While fears of another recession have increased, many private and government analysts expect the U.S. and global economies to continue growing, if very slowly. Economists at IHS Global Insight, while noting that recession risks have risen in the U.S. and Europe, said they still don't expect a repeat of the 2008 meltdown and the damaging recession that followed.
The IMF this week cut its forecast for 2011 global growth by a third of a percentage point, to 4%, from its estimate three months ago. It predicted the U.S. would grow at 1.5% this year—or half the pace of growth needed to keep up with the expanding labor force. The IMF estimated euro-zone growth of 1.6%, and expects Japan's economy to contract.
The outlook dimmed even for fast-growing emerging economies, which helped pull the global economy out of its most recession. China is expected to expand 9.5% this year, the IMF said, slower than the 10.3% expansion in 2010. India was forecast to slow to 7.8% from more than 10% last year.
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Bloomberg News Industrial orders in the euro zone have been falling. Pictured, a manufacturing plant in Düsseldorf.
Thursday's market turmoil caused some observers to recall the period around the 2008 financial crisis when upheaval in the U.S. financial system shook markets and economies around the world. The events triggered the first global recession since the Great Depression, pushing world-wide economic output down 0.7% in 2009.
"A lot of the symptoms we saw in 2008 are being repeated today in Europe," said Guillermo Ortiz, a former governor of the Bank of Mexico, suggesting the world may be facing "perhaps the longest financial crisis recorded in history."
Rapid growth in China, the world's second-largest economy, is proving less reliable as an economic engine. The preliminary gauge of Chinese manufacturing sentiment by HSBC fell to 49.4 in September from a final reading of 49.9 in August. A reading below 50 indicates the industry is contracting.
Global package-delivery firm FedEx said the Asia slowdown—specifically shipments of electronics from China—was largely responsible for a 4% drop in its international priority volume during the quarter. Chief Executive Fred Smith told analysts, "The consumer just doesn't have an appetite" for buying more.
The risk, some economists say, is that consumers—the main driver of U.S. economic activity—will cut spending more, turning recession fears into reality. Some businesses say they are already seeing that happen—and they are preparing for trouble ahead.
In Martinsville, Va., Hooker Furniture has been building up cash reserves. The company had $30.4 million in cash as of July 31, almost double its reserves a year earlier. "Every day seems to bring new surprises," chief financial officer Paul Huckfeldt said. "We saw growing discomfort and felt like the cash mitigated some of those risks."
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There are signs consumers are cutting back on everything from cars to vacations. Used car retailer CarMax Inc. on Thursday reported a 2% drop in same-store used-car sales, which chief executive Tom Folliard attributed to "lower consumer confidence."
James O'Sullivan, chief economist for brokerage MF Global, said dour sentiment among consumers often doesn't translate into lower actual spending—one reason he doesn't expect another recession. "The hard data so far are holding up better than the confidence numbers," Mr. O'Sullivan said.
European consumers are nervous. Consumer confidence in the euro zone tumbled to its lowest level in two years, the Brussels-based European Commission said Thursday. "It's really been lots of pretty dismal data for the euro zone," said Howard Archer, chief European economist for the research firm IHS Global Insight. "The fourth quarter is starting to look very worrying."
An index of business activity in the 17 countries that use the euro showed a sharp slowdown in both the service and manufacturing sectors. The combined index, released Thursday by the research firm Markit Economics, fell to 49.2 in September from 50.7 in August. The drop below 50—which indicates activity is falling—was the first in over two years. A measure of new orders—an early look at economic activity in the months ahead—fell at its steepest rate since July 2009.
Industrial orders in the euro zone fell 2.1% in July compared with June, the second consecutive monthly decline, according to data from the European Union. Industrial orders in the broader 27-member European Union also fell.
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In the U.S., the White House and Congress remain far apart over how to jump-start the recovery: Democrats advocate more government spending and tax cuts. Republicans want more spending cuts and deficit reduction. "We have a political system that looks manifestly broken and makes people nervous about the future," Treasury Secretary Tim Geithner said Thursday.
The U.S. economy has flashed warning signs since the U.S. debt-rating downgrade in early August. The labor market added no jobs last month and unemployment remained stuck at 9.1%. Consumer and business confidence has dropped to the lowest levels since the recession, raising the risk of a broader pullback in demand.And the housing market remains gummed up by a supply glut, rising foreclosures and depressed prices.
The numerous ills led the Federal Reserve to cite "significant downside risks to the economic outlook, including strains in global financial markets" in a statement Wednesday, explaining why it was easing policy further. |
