New York: The ugly stock market drop Wednesday began after bad news from two of the world’s largest economies. China reported the worst manufacturing output in 17 years, and Germany said that its economy actually shrank in the spring. These are not isolated problems. In addition to China’s slowdown, nine major economies are in recession or on the verge of it.
Many of these countries have a common problem: They are heavily dependent on selling goods overseas. And this is not a good time to have an export-driven economy. China’s slump and President Donald Trump’s trade war are both undercutting with the global exchange of goods that had helped power the global economy for decades, and some of these countries are seeing sharp declines in exports.
In other nations, notably Argentina and Russia, long-standing problems at home are bubbling over at a moment when global investors are skittish and quick to bolt, which exacerbates trouble.
As the woes add up, there aren’t a lot of obvious rescue boats to help, which is why investors are fleeing to the usual safe havens: gold and government bonds.
“I see fires everywhere, but not a lot of firefighters,” said Sung Won Sohn, an economics professor at Loyola Marymount University and president of SS Economics.
Nine on the brink
The German economy shrank 0.1 per cent in the second quarter after anaemic 0.4 per cent growth at the start of the year. Two consecutive quarters of negative growth is the technical definition of a recession, and Germany is nearly there, sparking fears of an official recession by the end of the year. Germany is heavily reliant on manufacturing cars and other industrial goods to power its economy.
The UK story is similar to Germany’s. Growth contracted 0.2 per cent in the second quarter after a weak 0.5 per cent performance in the first quarter. On top of manufacturing woes, the United Kingdom has seen an investment slump, largely due to uncertainty over Brexit.
The Eurozone’s third-largest economy has struggled for years and entered a recession last year. And 2019 hasn’t been much better. Growth in the second quarter was just 0.2 per cent, and there’s concern that will turn negative, as Italy sells some goods to Germany, which is now in worse shape.
Mexico’s economy contracted 0.2 per cent at the start of the year and barely escaped an official recession in the second quarter by growing just 0.1 per cent. Mexico has also suffered decline in business investment and confidence as companies fear leftist President Andres Manuel Lopez Obrador will nationalise industries.
The largest economy in South America shrank 0.2 per cent in the first quarter and is widely expected to show negative growth again in the second quarter when the official data comes out at the end of August, marking a recession. Brazil has struggled to sell goods overseas and also seen sluggish demand at home.
Argentina is in crisis. It’s already in a recession, and it appears to be getting worse. On Monday, Argentina’s stock market dropped nearly 50 per cent, the second largest one-day crash any nation has experienced since 1950. The country is experiencing rapid inflation, when prices spikes, and President Mauricio Macri was defeated in the nation’s primary elections.
The Asian nation reported Tuesday that its economy contracted 3.3 per cent in the second quarter, a sharp reversal from over 3 per cent growth in the first quarter. Singapore blamed the US-China trade war for its problems, as its economy is heavily reliant on exports.
South Korea managed to avoided a recession in the first half of the year — barely. The South Korean economy shrank 0.4 per cent in the first quarter but rose 1.1 per cent in the second quarter, a better-than-expected performance that many experts don’t think will last. Japan and South Korea are now in the midst of a trade war of their own that is expected to drag down growth and make it harder for South Korea to sell electronics and cars abroad.
A Russian economic institute warned last week that Russia could be in a recession by the end of the year after growing a modest 0.7 per cent in the first half of 2019. Russia has struggled since 2014 as oil prices plummeted and other nations put sanctions on Russia because of its military actions in Ukraine.