London
(CNN Business)Five big economies are at risk of recession. It won't take much
to push them over the edge.
The British economy shrunk in the second quarter, and growth flat lined
in Italy. Data published Wednesday show Germany's economy, the world's fourth largest, contracted in the three months to June.
"The bottom line is
that the German economy is teetering on the edge of recession," said
Andrew Kenningham, chief Europe economist at Capital Economics.
Mexico just dodged a recession— usually defined as two
consecutive quarters of contraction — and its economy is expected to remain
weak this year. And data suggest that Brazil slipped into recession in the second quarter.
Germany, Britain, Italy,
Brazil and Mexico each rank among the world's largest 20 economies. Singapore and Hong Kong, which are smaller but still serve as vital hubs for
finance and trade, are also suffering.
While growth has been dragged lower in each country by a
specific cocktail of factors, a global manufacturing slump and a sharp drop in
business confidence have made matters worse.
China's massive economy is growing at the slowest pace in
nearly three decades as the country wages a prolonged trade war with the United States, which
will impose new taxes on Chinese exports in September and December.
"The common feature is the weak global backdrop,"
said Neil Shearing, group chief economist at Capital Economics.
The International Monetary Fund last month cut its forecast for global growth this year to 3.2%, the
weakest rate of expansion since 2009.
It also downgraded its expectations for 2020 to 3.5%.
Investors are increasingly worried. The bond market is flashing warning signs and more than a third
of asset managers surveyed by Bank of America expect a global recession in the
next 12 months.
5
economies at risk
Germany relies heavily on exporters that sell a
disproportionate amount of goods to China and the United States. Lackluster
global auto sales have also hit its carmakers.
"Today's GDP report definitely marks the end of a
golden decade for the German economy," said Carsten Brzeski, chief
economist in Germany at the Dutch bank ING.
While fears of a chaotic Brexit are helping to drag down
the German economy, that issue is causing the most pain in the United Kingdom, where the economy is
shrinking for the first time since 2012.
The British economy should rebound in the third quarter
and avoid an immediate recession. But if Prime Minister Boris Johnson pulls the country out of the
European Union without a deal to protect trade on October 31, a recession would
likely be unavoidable.
In Italy, weak productivity, high youth unemployment, huge
debt and political turmoil are to blame for its continued malaise.
Investment has dropped in Mexico and the country's
services sector is under pressure. Brazil, the largest economy in Latin
America, is suffering from weak industrial production and high unemployment.
Data due in the coming weeks will confirm whether it has fallen into recession.
Storm
clouds
Shearing argues that some of the gloom and doom is
unjustified. At a global level, he says, spending by companies on assets such
as equipment have stabilized. The labor market is resilient.
"While there are pockets of extreme weakness in the
world economy — particularly in manufacturing — other parts are holding up
relatively well," he said. "All of this is consistent with our view
that global growth is slowing rather than collapsing.
Yet he also points to three big risks.
The first is the trade war. If Beijing and Washington
continue to ratchet tensions higher, business confidence could plummet. The
International Monetary Fund has warned that growth in 2020 would be slashed by
half a percentage point if the dispute escalates further.
Another big risk is that central banks fail to act,
causing a negative reaction in financial markets that feeds through to the real
economy. The US Federal Reserve cut rates last month for the first time
in 11 years, and the European Central Bank has hinted that it will unleash more
stimulus in September. Pressure is building on China to cut its main interest
rate for the first time in four years.
Other central banks from India to Thailand have slashed
rates, and more cuts are expected.
The final risk is that the global services sector, which
has supported growth, begins to mirror the downturn seen in manufacturing.