Thursday, August 28, 2008

Global Outlook: Recession Fears Expand Beyond the U.S.

by Amy Lillard

The subprime mortgage debacle has had far reaching effects in the U.S. economy. But the effects go beyond our own borders. The economic turmoil has ricocheted throughout the global economy, causing inflation, recession fears and general anxiety.

Consider Europe, which is experiencing the fastest inflation in 16 years and the prospect of a widespread recession. Inflation is currently double the European Central Bank's 2 percent ceiling, and household spending power is quickly being eroded across the continent.

The ECB has authorized nine interest-rate increases since December 2005, in attempts to curb inflation and slow down money-supply growth. The ECB reported this week that this M3 money supply, a figured used as a gauge of future inflation, rose 9.3 percent from a year earlier. This is the weakest growth since November 2006, but still nearly twice the ideal amount to rein in inflation. Policy makers kept the benchmark rate at 4.25 percent this month, a seven-year high, on concerns that inflation may push up wages and prices.

At the same time, European retail sales have declined for a third month in August. Although the measure of sales activity in the region using euros increased slightly this month, it's still the third month the reading held below 50, the boundary between growth and contraction. An executive survey also revealed retailers cut jobs for a fifth month.

Overall, confidence is low across Europe. German business confidence has fallen to a three-year low and consumer sentiment dropped to the weakest since 2003. In France, the housing inventory has reached a record this summer.

In the UK, the outlook is particularly bad. House prices declined this week at the fastest annual rate since 1990, with the average value of a home falling 10.5 percent. At the same time, retail sales have plummeted to the lowest rate since the survey began in 1983. British lending organizations have limited their loans since the subprime collapse, with a 65 percent drop in mortgages granted since last year. The reports suggest a recession is imminent, and forecasts predict the Bank of England will be forced to cut interest rates this year despite fears of inflation.

The economic troubles reach beyond Europe into Latin America, Africa and Asia. In Japan, inflation is a rising concern. Bank of Japan leaders are suggesting a key interest rate increase as the economy shrank at an annual 2.4 percent rate in the second quarter, putting it on the brink of recession.

Globalization has meant significant benefits to the world's economies and citizens, but it also means that the economic problems of one country extend to every country. The ability to recover from our current economic woes will also be affected by the interrelated nature of our global financial systems.

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