Most global strategists and economists are begrudgingly forecasting a short, mild 2012 recession for Europe. But with fiscal crisis, bad debts and austerity sweeping the lands, surely short and mild could prove wildly optimistic.
This week the IMF considers the impacts of a potentially longer, deeper recession in Europe and the US, and the dramatic (in my view more realistic) impact that would have on the fastest growing economies like China( not to mention commodity exporters like Canada and Australia):
China would be highly exposed through trade linkages. Europe and the United States together account for nearly half of China’s total exports. Lower global demand would, therefore, feed back negatively to corporate and financial sector balance sheets, hampering the performance of firms in the tradable sector (where excess capacity is already prevalent), increasing NPLs, and potentially prompting banks to deleverage. This would further reduce investment, employment and growth and could trigger a decline in China’s property market. In the absence of a domestic policy response, China’s growth could decline by as much as 4 percentage points relative to the baseline projections leading to broad-based consumer and asset price deflation. China’s vulnerability to external shocks was highlighted in the global financial crisis, when global growth fell by around 61⁄2 percent. In China, even after a huge credit and fiscal stimulus response, which boosted growth by at least 6 percentage points, growth still fell by 5 percentage points.