Achoo!

America has long been the linchpin of the global economy.  It has often been suggested that when America sneezes, the world catches a cold.  So far, the world’s largest economy has not reached for a tissue or even sniffled, but large trading partners are exhibiting signs of weakness.

Europe seems to be trending toward stagflation.  The continent’s pace of economic growth has been rather anemic, yet inflation remains high.  Their purchasing managers indices are under 50.0 (click here for details), suggesting a recession has enveloped their economy.  Nevertheless, the European Central Bank has not relented on its worries about inflation.  Instead, Christina Legard, its president, remains committed to calming price pressures.  These bankers gathered yesterday, so don’t be surprised to read headlines today and over the weekend detailing their commitment to achieving their inflation target of 2.0 percent.

Meanwhile, China has economic woes of its own.  As the nation became the globe’s manufacturing hub over the past few decades, other Asian nations benefited.  According to this article from The Economist, a real-estate slowdown has curbed Chinese spending in neighboring countries, including a 20 percent decline in South Korean exports to China year-over-year in August. 

Given our nation’s trade deficit, it can be hard to remember that America isn’t just an importer.  Our economy sells quite a bit to both China and Europe.  Slowdowns in these nations could reduce demand for our wares.  To further complicate matters, stresses in China and Europe could translate into global supply chain woes.  China, in particular, may also suffer from a real-estate induced banking crisis while geopolitics may blow back on technology firms operating there. Should any of these develop, it may further hurt output in America.

Will America catch a cold? That remains to be seen.  However, it cannot be denied that our economy is tied closely to our trading partners.  Fortunately, we also trade a lot with both Mexico and Canada, a trend that will probably have further benefit as friendshoring becomes more solidified.  The former’s growth rate is likely to outpace America’s this year, and the latter has one of the best balance sheets in the G-7 according to their budget website.  America’s neighbors are faring relatively well these days, so this should offer some shelter should a global slowdown begin developing further.