The market is holding together at high retracement levels for the S&P. Yields reflect a stable d...
How Deep Will the Recession Bite?
12/16/2008 12:00 pm EST
Knight Kiplinger, editor-in-chief of The Kiplinger Letter, discusses some of the possible fallout of a global recession.
There’s no denying a broad global recession—and that will make a US recovery harder.
We expect worldwide growth to dip to zero next year, the worst overall economic performance since 1975 and far below the 2.5% accepted as a global recession.
Trade will shrink 2.1% worldwide, and US exports will contract by 0.5%, the first overall decline since the recession of 1982. Until recently, trade was the strongest factor keeping the US economy in positive growth territory.
Worst off: the UK, Euro zone, and Japan, which face recessions deeper than in the US.
The economies of Canada and Mexico will rise and fall along with the US, their outsize NAFTA partner.
China’s 6.9% gain will be envied by all, but the reality is more painful. Its economy is one-third the size of the US’s, but it has ten times as many people entering the labor force every year. Growth below 8% will mean untenable unemployment.
The risk of global deflation is growing, though it’s still relatively small. Most central banks are cutting rates to loosen credit and restore growth.
There’s also a risk of increased protectionism. Imports are often a scapegoat in harsh economic times. More countries will be tempted to raise trade barriers to the legal limit under the World Trade Organization, rolling back recent gains.
There’s one silver lining for the US: Foreigners will keep buying its debt. Liquid markets, innovation, a stable legal system, and a dearth of good alternatives make US securities attractive enough for investors to accept rates near zero.
Weaker US exports will hurt most sectors, especially capital goods. Hardest hit: machine tools, chemicals, plastics, mining gear, and turbines. Civil aircraft sales contracts will be stretched out, though expectations that oil prices will rebound in time will force airlines to buy more planes that are energy efficient.
Service exports will see a decline as well. Demand for US financial services by foreign firms will fall, as will sales of travel, hospitality and leisure services.
There will be a few areas that should weather the storm relatively well. Demand for medical services and products tends to be inelastic. Sales of farm goods will fall, then stabilize, and prices will firm up by spring.
China and India will keep buying construction equipment and services, because their economic growth is dependent on more infrastructure development. Out of roughly 25 million US small businesses, only 240,000 export, a far lower percentage than in the rest of the world.
But the bottom line remains: the US can’t export its way out of recession.
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