NEW HAVEN – For the second time in three years, global economic recovery is at risk. In 2008, it was all about the subprime crisis made in America. Today, it is the sovereign-debt crisis made in Europe. The alarm bells should be ringing loud and clear across Asia – an export-led region that cannot afford to ignore repeated shocks to its two largest sources of external demand.
Indeed, both of these shocks will have long-lasting repercussions. In the United States, the American consumer (who still accounts for 71% of US GDP) remains in the wrenching throes of a Japanese-like balance-sheet recession. In the 15 quarters since the beginning of 2008, real consumer spending has increased at an anemic 0.4% average annual rate.
Never before has America, the world’s biggest consumer, been so weak for so long. Until US households make greater progress in reducing excessive debt loads and rebuilding personal savings – a process that could take many more years if it continues at its recent snail-like pace – a balance-sheet-constrained US economy will remain hobbled by exceedingly slow growth.
A comparable outcome is likely in Europe. Even under the now seemingly heroic assumption that the eurozone will survive, the outlook for the European economy is bleak. The crisis-torn peripheral economies – Greece, Ireland, Portugal, Italy, and even Spain – are already in recession. And economic growth is threatened in the once-solid core of Germany and France, with leading indicators – especially sharply declining German orders data – flashing ominous signs of incipient weakness.