U.S. Slump: A Domino Effect?

If the U.S. economy slipped into recession, would it drag the rest of the industrial world into a slump? Although many leading economies overseas are already slowing, economist Tony Riley of A. Gary Shilling & Co. doubts whether a U.S. contraction by itself could touch off a worldwide recession.

Riley bases his view on the contribution that merchandise exports to the U.S. make to the economic output of other G-7 countries. While exports account for 15% to 20% of the gross domestic products of Germany, France, Italy, and Britain, for example, exports to the U.S. account for only 1.2% to 2.6% of their GDP. And though Japan sends 30% of its exports to the U.S., exports account for only 8.6% of its output, so the U.S. export share still comes out to only 2.6%.

The bottom line: Assuming a 9% decline in U.S. imports (the drop actually recorded during the 1990-91 recession) and a multiplier effect that triples the direct contractionary impact, a U.S. downturn would cut European and Japanese growth by only one-third to three-quarters of a percent.

A U.S. slump, of course, would be bad news for Japan because Japan's economy is already in deep trouble. Still, aside from Canada, whose exports to the U.S. are equal to 24% of its GDP, no major industrial nation is likely to experience more than a slowdown caused by a U.S. recession. "If their economies falter," says Riley, "the fault will lie with their own domestic policymakers."

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