Commentary: There is growing evidence of a global slowdown. Italy and Turkey are already in recession. The French and German economies are showing signs of weakness. Add to this uncertainty about Brexit. All this has caused sufficient concern that the European Central Bank to announce a new stimulus program hoping to avoid a wider EU downturn.
Meanwhile, evidence is mounting of a big slowdown in China, with industrial output and retails sales weakening. While trade negotiations continue, tensions with the United States adds to the risk to the Chinese economy.
A natural question to ask is, what does a global slowdown mean for the United States?
Should the global economy move into recession, demand for American exports will fall. One of the primary indicators of the global slowdown is moving toward recession is, as it happens, declining exports from the United States.
A global recession pushes down prices outside the United States, making U.S. exports less competitive. U.S. business lose market share to foreign competitors. Both these effects—declining demand and increased competition for third country customers—reduces U.S. exports thereby putting downward pressure on the U.S. economy.
Global woes aren’t all bad news for the United States, however. The United States competes with overseas business for raw materials. A global recession means less global demand for raw materials, hence, lower prices.
Since October, oil prices are down 25% and cooper by 15%. Lower commodity prices are good news as lower raw material costs means higher profits, providing U.S. businesses with an incentive to hire and expand.
What is good news for the rest of the country, may be not such good news for New Mexico as we are commodity exporting state. Cooper production in Silver City is sensitive to global cooper prices.
The situation in the oil patch is a more complicated. In prior recessions, falling oil prices have had negative effects on oil production in New Mexico. The technological breakthroughs driving the current fracking boom is a force unto itself. How sensitive New Mexico oil production will be to global prices, given the new technology, is unclear.
Taken in total, a global recession is not likely to have much effect on the United States. It’s an “on the one hand/on the other hand” type of phenomena. Demand is down, but so are raw material prices.
But what if China should go into recession? Beginning in mid-1980s, China has been a global juggernaut, growing at a rate exceeding 5% year-in-year-out. China is now the world’s largest economy. Right now the outlook is for slowdown not downturn, but there are troubling signs. No one knows the impact of an actual recession would be.
Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. He teaches, among other things, open economy macroeconomics. The opinions expressed here may not be shared by the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu.