In the last three months of 2012, the United Kingdom (U.K.) experienced a contraction in its gross domestic product (GDP). Another contraction in the current quarter will put the U.K. into another recession. (Source: Reuters, March 12, 2013.) So far this quarter, the economic numbers don’t look good for the U.K., as manufacturing fell 1.5% in January.
Of course, many eurozone members are deep in recession. Jens Weidmann, President of Germany’s central bank, the Bundesbank, said this week, “The crisis is not over despite the recent calm on the financial markets.” (Source: Kuehnen, E. and Carrel, P., “Euro woes not over, German central bank says, as piles up crisis fund,” Reuters, March 12, 2013.) First it was the debt-infested nations that caused economic chaos; now stronger nations, like France, are struggling to keep up as they face high unemployment rates.
The situation elsewhere in the global economy is deteriorating quickly, and it’s not just the U.S., U.K., eurozone, Japanese, and Chinese economies that are suffering. According to JPMorgan Global Manufacturing and Services Purchasing Managers’ Index (PMI), the global economy’s output dropped to its lowest level in four months in February 2013, reaching 53.0, compared to 53.2 in January. (Source: Markit, March 5, 2013.) Any reading below 50 marks contraction.
Demand drives economic growth. If there is bleak demand in the global economy, a recession becomes a very likely scenario. The major economic hubs in the global economy are suffering through an extensive recession or are seeing their economies slow. It’s not very convincing, to me, to believe there is any economic growth in the global economy.
If the global economy does fall back into recession, and there is a big possibility it could, it will have a major impact on the U.S. economy, especially on American-based multinational corporations. When countries in the global economy see a decrease in exports and imports, the companies that sell and manufacture goods come under scrutiny, as their profits decline.
Major U.S. companies, like those on the S&P 500, are already displaying negative profit growth—which will lead to more uncertainty. And I doubt excessive money printing will help these companies this time around.
What He Said:
“When I look around today, I see falling stock prices…I see falling house prices…and prices for retail goods stores declining. The media has it all wrong blaming (worrying about) inflation. In my opinion, the single biggest threat to the U.S. economy and to the Fed in 2008 is deflation. You can bet the Fed will expand the money supply and drop interest rates aggressively as deflation starts to rear its ugly head.” Michael Lombardi in Profit Confidential, December 17, 2007. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.