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Rising Fears of New Global Recession

Author: Jonathan Masters, Deputy Editor
August 5, 2011

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Fears that the global economy could be moving again toward recession sent global markets plunging Thursday and Friday (WashPost), with economic and financial problems worldwide fueling a cycle of upheaval. The plummet in stocks followed President Barack Obama's signing of the $2.4 trillion debt-limit increase earlier in the week, a process that raised concern about Washington's ability to correct its mounting fiscal problems.

Though the U.S. economy continues to struggle, employers added 117,000 jobs (NYT) in July, the Labor Department reported on Friday. The figure was far more than the 18,000 net new jobs reported in June and the most new jobs added in a month since April. Unemployment dropped slightly to 9.1 percent.

Yet more broadly, a troubling dynamic is taking hold where spreading debt in Europe creates new risks for the United States, and the chance of another U.S. recession worsens the European fiscal crisis. These hurdles come as China and other rising economic powers are trying to slow their economies to combat inflation. Central bank interventions in Europe and Japan (FT) were unable to quell investor fears over slow economic growth and a eurozone debt crisis. The European Central Bank purchased government bonds for the first time since March, as the Bank of Japan stepped into the currency markets to slow the rise of the yen.

Writing for the New York Times, Floyd Norris notes that the U.S. economy could be entering a double-dip recession, a second period of decline where the U.S. government is preoccupied with cutting spending and typical policies aimed at combating economic weakness have been taken off the table. Although most analysts believed the country was making a slow recovery, the recent annual revision of the U.S. GDP indicates the recession seems to have been deeper and the recovery more anemic than previously thought.

In response to the question, “why now?,” Steven Pearlstein in the Washington Post writes that structural problems in the United States and global economies that caused the 2008 crisis were “never really fixed.” Some economists are concerned that slow growth in the U.S. economy may itself be a driving factor in the road to a potential recession. Weak growth could undercut consumer and business confidence, instill a loss of faith in the recovery of stock prices, and prompt fears in the credit market, according to Bloomberg's Peter Coy.

The Economist reports that ”All financial-market signs now point to a return to economic contraction,” including a nearly 10 percent drop in the S&P 500 in the last two weeks and market expectations of rising inflation. However, the Fed seems likely to act, perhaps with a new round of quantitative easing or other forms of intervention.

Selected Analysis

Despite global market fears of a U.S. credit downgrade, U.S. treasuries will remain the safest bet for international investors, says global economics expert Kent Hughes in a CFR interview.

The agreement on raising the debt ceiling falls far short of the deep reforms needed to improve U.S. spending patterns and the country's global standing, writes CFR's Sebastian Mallaby.

“As long as 330 million living Americans require promised entitlements--the $66 trillion that wear shoes are as much of a liability as the $10 trillion on paper,” writes William Gross of Pimco Asset Management about the U.S. debt morass.

Reforming the U.S. tax code is one of President Obama's last chances to “pour growth hormones into a sickly economy and get jobs back before November 2012,” writes Stephen Moore of the Wall Street Journal's editorial board.

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