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April 14, 2008 | by  | in Online Only | [ssba]

The Losers in the Coming Credit Crunch

I’ve been blogging about the effect that the sub-prime mortgage crash — and subsequent credit crunch in the United States — has had on specific countries. We all know that the US can no longer contain its crisis, its spilling everywhere like a violent chunder. So I thought about sitting down and working out how a global recession or economic slowdown was going to effect states more globally.

Thankfully the great folks at Foreign Policy Magazine have done it for me. Here is their predictions for what the economic effects of a global recession would be: Both regionally and at a state level.

Mexico and Canada: Living next door to world’s biggest economy has its advantages, but it has big drawbacks, too. Exports to the United States represent about a quarter of each country’s GDP, so direct trade links will bear the brunt of a slowdown. Expect the manufacturing sectors of both countries to feel the pinch.

China: The world’s fastest-growing economy can’t help but be affected when the world’s largest economy slows down, since China relies on exports to the United States as one of its main sources of growth. In recent years, China has boasted double-digit growth. Officially, Chinese economists expect growth to slow down to 9 percent in the wake of a U.S. recession, but only if such a recession is mild, lasting two quarters. If the U.S. recession is severe—four quarters or more—and is centered on a faltering U.S. consumer who buys fewer Chinese goods, then China’s growth is likely to slow to 6 or 7 percent, a hard landing, indeed.

Indonesia, Malaysia, Taiwan, and South Korea: China gets raw materials such as timber and rubber from Southeast Asian countries like Indonesia and Malaysia. Other East Asian countries, like Taiwan and South Korea, send component parts to the mainland, which are then assembled into finished products that are shipped to the United States. Both groups of exporters are likely to fall—and fall hard—if a drop in Chinese exports to the United States leads to less Chinese demand for these goods and raw materials throughout Asia. Keep an eye on metals, coal, and food products in particular.

Latin America: Chile’s got copper; Brazil’s got minerals; Argentina’s got livestock and feed. They’ll have to scrounge to sell these and other commodities elsewhere if the United States and China isn’t buying as much as before. Prices of commodities could fall by 20 to 30 percent in a U.S. recession followed by a sharp economic slowdown.

Estonia, Latvia, Lithuania, Hungary, Bulgaria, Romania: They all run large deficits, are experiencing excessive credit booms and housing bubbles, and have an overvalued currency. If capital dries up because of the global credit crunch, it could lead to deep financial woes for these smaller European economies: Households that borrowed Swiss francs or Euros to finance their mortgages could go bankrupt and, in turn, local banks could go belly up.

Britain, France, and Germany: As a recession in the United States takes hold, the fall in U.S. demand will mean lower exports by European companies, as well as lower sales and profits for European firms—such as BMW, Unilever, and others—that produce everything from cars to consumer products in the United States. A weaker dollar means that the value—in euros—of European investments in the United States will suffer a major capital loss. High oil prices won’t help, either. And the deflation of housing bubbles in Britain, France, Spain, and elsewhere will slow down growth across the continent.

Japan: The Japanese economy is perpetually anemic, always on the borderline between growth and recession, between inflation and deflation. A deep U.S. recession will likely tip Japan over the edge, and into a recession of its own. Most of Japan’s economic growth in the last few years has been driven by external demand for its goods (such as consumer electronics, cars, etc.), net exports with a weak yen. Domestic private consumption has been weak, as incomes and wage growth have remained flat. And, as one of the world’s largest energy importers, oil hovering at $100 a barrel will make it hard for Tokyo to shake off its economic malaise any time soon.

So if you’ve got loads of money tied up in a Latin America Japanese private domestic consumption trust, then you might wanna think about cutting down, or getting out.


About the Author ()

Conrad is a very grumpy boy. When he was little he had a curl in the middle of his forehead. When he was good, he was moderately good, but when he was mean he was HORRID. He likes guns, bombs and shooting doves. He can often be found reading books about Mussolini and tank warfare. His greatest dream is to invent an eighteen foot high mechanical spider, which has an antimatter lazer attached to its back.

Comments (4)

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  1. re: China, a lot of the Chinese bloggers at globalvoicesonline have been discussing how the industrial areas around Beijing will shut down for the Olympics to clear the air. Imagine if they figured the slowdown would create a reduced need for their manufacturing capacity, and kept those industrial areas down… of course they’d have to find something for everyone to do, but if the shut-down made Beijing hospitable they could open it up as a tourist mecca. That would inevitably draw tourists away from Aotearoa and mean that the credit crunch would hit us even harder, though. So perhaps for our the sake of our GDP we should pray that the Chinese Communist Party really does hate the environment.

  2. Kerry says:

    Me, I’m just expecting the global armagheddon predicted by Nostradamus will be precipitated by a combination of the oil prices/USA stockpiling, the Persian Oil wars, and the credit crunch all folding up the economy at the same time.

    I’ll be in the hills with my tent and my hunting knife, practising my reo and living amongst the hippies, guarding snails and tino rangatiratanga!

    Dunno what the rest of you will do in the city, but luk wiv dat.

  3. Jackson Wood says:

    Armageddon is this weekend! I’m so going to be there, I’ll be the one dressed up like Captain Jean Luc Picard.

  4. Emile says:

    He Kerry, there will be like thousands of tents next to you in those hills

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