Global Economies Backtracking

economic recoveryThe debt and growth problems in the eurozone continue to dominate the headlines. The eurozone countries are looking at the impact of Greece exiting the 17-country eurozone. Greece can’t even elect a coalition government to deal with the austerity measures.

Now there’s news that the eurozone is continuing to slide. Not really a surprise. The eurozone composite Purchasing Managers’ Index (PMI) contracted to 45.9 in May, the lowest level since June 2009, and below the 46.7 reading in April. It was also the ninth time the PMI was below the neutral 50 level since June 2009. The reading clearly indicates that growth will be challenged.

France is stalling. Germany, the largest and most influential country in Europe, expanded at a muted 0.5% in the first quarter. Moreover, declining inventories suggest less demand for goods. The problem is that the weakened countries of Germany and France are not conducive to economic recovery in the eurozone. You will discover over time that this is true.

My concern is that the fragility of the eurozone impacts the global economies that trade with the region. The 27-nation European Union is clearly feeling the pinch. Britain just entered its second recession since the financial crisis in 2008, impacted by the sluggishness in the eurozone. Britain saw its gross domestic product (GDP) contract 0.3% in the first quarter following a 0.2% decline in the fourth quarter. The country continues to face budgetary concerns and, without higher exports to drive revenue income, Britain will continue to face hardship this year and into 2013.

The European debt crisis and muted growth in the eurozone have also impacted China and in turn the Asia-Pacific region. Lower consumption in China means less demand for foreign goods made in Asia, Europe, the Americas, and other key trading partners.

The HSBC Flash China PMI, a barometer of Chinese industrial growth, came in at a disappointing 48.7 in May, down from 49.3 in April. The Chinese PMI has been in contraction for seven straight months and this will surely impact the country’s growth. China needs to focus on its domestic consumption, as I discussed in China’s Domestic Consumption Ambitions.

The World Bank predicts that the Chinese economy will expand at 8.2% this year, down from the 8.4% estimate made in November, but still well ahead of the industrial world. But, unlike some of the weaker eurozone countries and the U.S., China isn’t facing a mountain of debt. The country is rich, with over US$3.0 trillion in foreign exchange reserves. Back in 1977, the country had a mere US$2.3 billion, according to data from the State Administration of Foreign Exchange in China. The country cracked the US$1.0-trillion level in October 2006 and US$2.0 trillion in April 2009, before breaking US$3.0 trillion in March 2011. The country’s ability to increase its reserves clearly was the aftermath of its blossoming growth. The U.S. Treasury knows this and is allowing the Chinese to directly buy U.S. debt.

So, the reality is that if China falters and the eurozone sinks further into an economic coma, it could take years to recover and drive another global recession.