The starting point here is the state of the US economy, the largest in the world.
Falling house prices precipitated the current US downturn. Their performance could determine its depth and duration. The Federal Reserve has reacted by cutting interest rates on several occasions, a clear sign of pessimism about the economy's performance. In fact, the U.S. economy is not in a recession yet, technically speaking, as a recession is defined as two quarters of negative growth. So far, there have been no negative quarters, though growth levels are certainly turning down. Many critics argue that the pessimists could bring on a recession with their dire forecasts, hurting consumer and business confidence. Indeed, some of the data, like industrial production, durable goods and retail sales, was worse at the beginning of 2007 than in 2008. Moreover, the housing market only makes up 4.5% of GDP. By comparison, exports are 12 percent of GDP. Housing is weak, but exports are booming, rising 14% in the last year, in large part because of the weak dollar.
A recession looming for the US could affect countries all over the world that rely on exporting to the world’s biggest economy. Some analysts suggest that decoupling, or the process of decreasing dependence on American consumers, would prevent a recession’s effects from spreading. But the fact remains that the US is a top trading partner for many countries in the world, and even states that have little contact with US markets depend on countries that will feel the pinch of frugal American buyers. Fewer exports to the US from China, for instance, could cause its growth rate to dip and that tightening could spread throughout Southeast Asia. A weak US dollar may be a benefit to tourists shopping in American cities, but exacerbates US difficulties in buying foreign products. Even as countries find new and diverse outlets for their products, they cannot help but be affected by events in the USA. In an era of globalisation, no country is immune when the US falls onto hard times.
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. The manufacturing sectors in both countries are particularly affected.
China: The world’s fastest-growing economy cannot 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 only two quarters. If the U.S. recession is severe - four quarters or more - and centres on faltering U.S. consumers who buy fewer Chinese goods, then China’s growth is likely to slow to 6 or 7 percent.
Indonesia, Malaysia, Taiwan, and South Korea: China buys 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 suffer if a drop in Chinese exports to the United States leads to less Chinese demand for these goods and raw materials throughout Asia - in particular, metals, coal, and food products.
Latin America: Chile’s copper; Brazil’s minerals; and Argentina’s livestock and feed will all be harder to sell elsewhere if the United States and China are buying less than 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 overvalued currencies. 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 do likewise.
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 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. Record high oil prices don’t help, either. And the deflation of housing bubbles in Britain, France, Spain, and elsewhere will slow down growth across Europe.
Japan: The Japanese economy is 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 now exceeding $100 a barrel will make it hard for Tokyo to shake off its economic malaise.
Ironically, some parts of the U.S. economy will benefit. For example, a weaker dollar means that the export competitiveness of American trade partners will be reduced while U.S. competitiveness will receive a boost. American firms will benefit from more exports to the rest of the world. Sharply lower home prices are bad news for current home owners but good news to those renters who will now find buying a house more affordable.
There is a positive side. A U.S. recession and global economic slowdown will eventually lead to a sharp fall in the price of oil, energy, and other commodities. Heavy importers in these areas, particularly Europe, Japan, and China, will in consequence benefit. European tourists are also flooding into the USA hunting for bargains from a weak dollar. The savings on luxury goods, clothes, and shoes are becoming higher and higher, to the benefit of American retailers.
I hope this is helpful.