Sound The Trumpet : Japan Recession, Europe Stagnation Cast Pall Over Global Economic Outlook

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“Japan Recession, Europe Stagnation Cast Pall Over Global Economic Outlook”
by The Washington Post
November 18th, 2014

A sharp slowdown in Asia and stagnation in Europe are putting the global economy at risk of a prolonged slump, economists say, marked in places by sky-high unemployment, sluggish wage growth and some of the worst economic conditions in decades.

On Monday, Japan said it had entered its fourth recession in six years — this one despite aggressive efforts by Prime Minister Shinzo Abe to boost growth. Meanwhile, British Prime Minister David Cameron warned that the world’s economy could be headed toward another disaster.

“Six years on from the financial crash that brought the world to its knees, red warning lights are once again flashing on the dashboard of the global economy,” Cameron wrote Monday in Britain’s Guardian newspaper.

Two of the world’s economic powerhouses — Europe and Japan — are failing to bolster global growth, and their economies appear to be getting worse. With an unemployment rate of 11.5 percent, the euro zone is experiencing conditions that some economists say echo the Great Depression.

Emerging markets, which helped lift the world out of the ugly downturn that followed the 2008 financial crisis, are also lagging. Russia and Brazil have been dogged by recession, and China’s double-digit growth has slowed rapidly as the country has matured and a speculative real estate bubble has let out air.

China is “the thousand-pound gorilla in the emerging world and a big, big question mark,” said Nariman Behravesh, chief economist at the consulting firm IHS.

Conditions differ markedly from the financial meltdown of 2008 that sparked a worldwide crisis. “It’s not like the world is leveraged up and ready to plunge back into the abyss,” said Jay Bryson, a global economist at Wells Fargo. “The challenges today are a lot different.”

For the United States, the developments have raised few concerns. The U.S. economy is growing at a solid pace of 3 percent per year, and falling gasoline prices have pumped roughly $80 billion into American wallets. The Dow Jones industrial average rose 13 points Monday, and the Standard & Poor’s 500-stock index edged toward a record high as lucrative mergers at home obscured bad news abroad.

Still, exports represent 13 percent of the U.S. economy and have slumped a bit, the first sign that sustained weakness abroad could limit the American recovery.

Economists said stagnation and political paralysis in Europe are perhaps the most worrisome features on the global landscape. In the Guardian, Cameron described the euro zone as “teetering on the brink of a possible third recession, with high unemployment, falling growth and the real risk of falling prices too.”

Add in stalled trade talks, conflict in the Middle East, fighting in eastern Ukraine and the alarming spread of the Ebola virus, Cameron warned, and the world is functioning against “a dangerous backdrop of instability and uncertainty.”

Cameron’s bleak prognosis came at the end of the Group of 20 summit in Brisbane, Australia, where leaders of the world’s biggest economies struggled with strategies for kick-starting growth. Similarly negative pronouncements have echoed from other sources in recent days, particularly in relation to Europe.

Mark Carney, the governor of the Bank of England, told reporters in London last week that “a specter is now haunting Europe — the specter of economic stagnation.” International Monetary Fund chief Christine Lagarde has warned of “the risk of a new mediocre” in Europe, with low growth, low inflation, high unemployment and high debt.

On Monday, European Central Bank President Mario Draghi presented European lawmakers with a list of policy recommendations to stimulate growth, arguing that monetary policy alone cannot solve the problem.

Draghi said that “2015 needs to be the year when all actors in the euro area — governments and European institutions alike — will deploy a consistent common strategy to bring our economies back on track.”

Leaders in Europe and the United States have urged Germany — Europe’s largest economy, teetering on the edge of recession itself — to boost public spending. But German leaders continue to insist that other struggling euro-zone countries need to restructure their economies first.

Europe is hardly the only sick patient. Government figures released Monday in Japan showed the world’s third-largest economy shrinking for the second quarter in a row, with gross domestic product falling by 1.6 percent.

The report stunned forecasters, who had been expecting solid 2 percent growth, and served to undermine Abe’s plan for reviving an economy that has suffered two decades of stagnation, falling prices and dangerously high government debt.

That plan included an increase in the national sales tax in April — the first in 17 years — that slowed consumer spending far more than expected, Japan’s economy minister acknowledged Monday.

“The numbers are absolutely awful, beyond-description awful,” said Peter Tasker, a longtime analyst of Japan’s economy and a supporter of Abe’s policies. “It’s clear that the tax hikers and the fiscal hawks have tanked the economy.”

In response, Abe is expected to announce Tuesday that he will dissolve the lower house of Japan’s parliament and call a snap election for December, enabling him to delay a second sales tax increase scheduled for the fall of 2015.

By contrast, India, Britain and the United States have been among the world’s bright spots. U.S. job growth has been steady for a full year, and unemployment is back to pre-crisis levels. With oil prices plummeting, economists said even a recession in Europe probably would not knock the United States off track.

“Things would have to get really bad in the global economy for the U.S. economy to begin to suffer again,” Behravesh said.

Still, “we have to be on guard about possible ramifications for the U.S. economy,” said Joel Prakken, senior managing director of the forecasting firm Macroeconomic Advisers, which has already knocked a few points off its projections for U.S. growth in 2015.

Prakken called “a freshened round of financial turbulence the most insidious threat.”

“Financial contagion,” he said, “knows no boundaries.”

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