The fate of the U.S. economy this year may depend less on world leaders gathering in Mexico this week to confront Europe’s economic crisis and more on voters in Greece, who went to the polls on Sunday to elect a new government. If that government refuses to accept the austerity pact tied to a European Union bailout or withdraws from the eurozone, the shockwaves will rattle the globe.
The threat of a fractured eurozone already is slowing production in Asia, and European banks are tightening lending to global customers. “The debt crisis in the euro area remains the biggest threat to the world economy,” the United Nations said in a June 7 report. “An escalation could trigger turmoil in financial markets and a sharp rise in global risk aversion, leading to a contraction of economic activity in developed countries and a sharp slowdown in developing countries.”
“If all the negatives intensify, a global recession can no longer be dismissed,” economist Don Ratajczak said in his weekly commentary published by Raymond James/Morgan Keegan on June 5. “Almost everyone in Europe appears to be in or near recession.”
Europe dodged at least one bullet earlier this month when eurozone leaders put up $125 billion to shore up Spain’s banks. But there are more bullets in the gun, and the EU will have to dance faster if it can’t come to terms with Greece — or with itself — over whether to pursue austerity or stimulus.
In the face of more potential shocks, China unleashed a round of stimulus spending on freight and transit infrastructure projects. Chinese GDP growth will slow to less than 9 percent in 2012 and 2013, after jumping 10.3 percent in 2010 and 9.3 percent in 2011, the U.N. report predicted.
China isn’t the only emerging market caught in the ripples of eurozone distress. The Brazilian government plans to keep cutting its interest rates to shake the once-bounding economy out of its slumber. Indian economic growth is expected to decelerate to no more than 7.9 percent expansion, after expanding 8.5 percent in 2010, according to the U.N. report.
Europe’s crisis touches the U.S. manufacturing heartland, too. U.S. exports to the EU, the second-largest market for U.S. goods, fell 11.1 percent in April from the previous month, the U.S. Bureau of Economic Analysis said on June 8.
“Europe has been a real drag on U.S. exports,” said Mario O. Moreno, economist for The Journal of Commerce and its PIERS sister company. Exports to northern Europe declined 4 percent in the fourth quarter of 2011 and 6.3 percent in the first quarter of 2012. Shipments of goods to the Mediterranean countries, including Spain, Italy and Greece, were down 8.3 percent in the fourth quarter and 16 percent in the first quarter, he said.
As a result, Moreno revised his expectations for growth in U.S. exports downward from 3.5 percent to 2 to 2.5 percent. “It’s still modestly positive,” he said, “and that’s because of China and other parts of the world” that are consuming more U.S. goods.