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The Eurozone economy’s growth almost ground to a halt in the third quarter of 2011 with just a 0.2% rise, reinforcing expectations that the region could slip into a ‘deep and prolonged recession’ next year. There is much debate in global financial and investment markets as to whether a European economic recession will pull US and Asian economies down in its wake. The European Union said last week that the Eurozone is expected to grow just 0.5 per cent in 2012, far below the 1.8 per cent growth predicted in the spring. Economic and financial turmoil has spread rapidly from Greece into other Eurozone countries. Third quarter results showed the Portuguese economy remaining in recession with a 0.4% fall in GDP, the Dutch economy contracting by 0.3%, and the Spanish economy stalling with zero growth between July and September. The Greek, Italian and Spanish governments have all fallen in recent weeks in the wake of economic concerns and the spiralling debt crisis. The BBC has produced an excellent interactive graphic showing how much money is owed by developed economies to banks in other nations providing a rough guide to the extent of the problems of each of the featured economies. In an increasingly interdependent world where businesses operate across national frontiers, economic anxiety in one country is contagious, quickly spreading to markets across the globe negatively affecting consumer confidence and demand.
The European Union is the United States’ most important trading partner with almost $475 billion in goods exchanged between the regions in the first nine months of 2011. Approximately 14% of revenues for the 500 biggest U.S. companies (roughly $1.3 trillion) comes from Europe and the weak U.S. economy makes it especially vulnerable to the European crisis. However, recent economic data in the US is inconclusive. Retail, housing and employment figures have all improved over the last two months, underpinning the rising trend in the US currency. Indeed, 70% of the revenues and profits of recently listed-company profit and revenues have been above analyst forecasts following deep cost-savings and improved domestic consumer demand.
However, the United States and Europe are so closely linked that any economic slowdown in Europe affects business confidence and demand in the U.S. Europe’s sputtering growth is already dragging on some U.S. companies’ profits and could further slow the U.S. economy. Manufacturers of cars, solar panels, drugs, clothes and computer equipment have all reported effects from Europe’s turmoil. Wells Fargo estimates that the U.S. economy will grow 2.1% next year, 0.4 percentage point lower because of Europe’s slowdown and Goldman Sachs thinks the region’s slowdown could shave a full percentage point off U.S. growth.
Not every U.S. company operating in Europe is struggling with McDonald’s, Kraft, Sara Lee Corp. and Oracle recently reporting strong results from their European operations, but General Motors’ third-quarter profit fell 15%, due mainly to slower sales and higher costs in Europe and Jeff Fettig, CEO of Whirlpool, said late last month that with demand tumbling in parts of Europe, the company plans to lay off 5,000 workers in North America and Europe.
Business Week suggests that U.S. exports to Europe are such a small share of its GDP that any drop in orders will have a minimal economic effect, but believes that financial contagion is another matter, with the U.S. and European banks intertwined. It examines the potential impact of a European recession in a recent graphic. You might like to use Newsmap to provide another visualisation of the crisis as it unfolds.
IB-style questions
1. Define the following terms:
- recession
- GDP
2. Explain the impact of trade patterns on the value of a national currency.
3. Analyse how government policies to manage national debt can affect business revenues and profits.
4. Select a firm operating in your country and evaluate the likely impact of the recent changes in the international economic environment on its objectives and strategy.
Extension Activity
An excellent exercise for your students is to select a multinational corporation based in your country and construct a PEST analysis incorporating the present financial and economic crises with an analysis of the potential impact of changes in the economic environment on its business performance. This could form the basis of an internal assignment or extended essay.
Other sources:
