Commentary: In a One-World Economy, a Slump Sinks All Boats

By Michael J. Mandel

Anywhere you look around the globe, the stream of bad economic news is unrelenting. On June 7, the British government released data showing that industrial production had fallen for three months in a row. The next day, Germany announced its second straight month of industrial decline. Then, on June 11, word came that the Japanese economy had unexpectedly contracted in the first quarter. Meanwhile, U.S. growth is flat, at best.

Coincidence? Hardly. With the global economy increasingly integrated, there are signs that the business cycle has gone global as well. In the not-so-distant past, business investment, residential construction, and consumption were only slightly synchronized across countries. When one region was weak, another was usually strong. As a result, global recessions were rare events, unless they were the result of major global shock such as the oil price increase of 1973.

But in the Internet Age, countries are becoming more and more connected--not only by trade but also by capital markets, by the flow of technology and ideas across national borders, and by psychology. Rather than rising and falling separately, national economies increasingly respond to the same forces.

The clearest evidence: A worldwide slowdown in domestic demand--the category that includes investment, consumption, and government spending. In Europe, domestic demand grew at a 0.4% pace in the first quarter, down from about 3% a year earlier. U.S. domestic demand is rising at a 0.2% pace, and Japan is flat.

This coordinated slowdown is much different than in the past. For example, in 1986 and 1987, business investment declined in the U.S. But that slump did not spread to Europe, where capital spending grew in excess of 6% annually. On the other hand, in 1993, business investment soared in the U.S. while it fell in Europe and Japan. Similarly, residential construction and consumer spending have generally been out of step across countries.

That's a key reason many people expected that increased globalization and trade would smooth out the ups and downs of any individual country's business cycle. A nation facing a slowdown at home could export more to other parts of the world while also easing up on imports. That, in fact, was often given as one of the reasons why the New Economy should be less affected by recession.

In fact, the opposite may turn out to be true, as tighter ties between countries cause downturns to spread faster. In particular, the slump in tech spending and other business investment has spread quickly from the U.S. to the rest of the world. First-quarter capital spending fell at a 4% annual rate in Japan, compared with a 2% rise in the U.S. Meanwhile, Eurostat, the European statistics agency, reported that total residential and business investment fell at a 3% pace in the first quarter. Companies such as Sun Microsystems Inc. are reporting that the tech slump is in full swing in Europe.

In part, this weakness reflects the fact that many countries have become increasingly dependent on exports to the U.S. to fuel growth, making them more vulnerable to any American slowdown. For example, European exports to the U.S. have more than doubled since 1993. So when U.S. demand for European goods fell sharply in the first quarter, European companies had less need to add new manufacturing capacity. The same forces are holding down Japanese investment, since U.S. imports from Japan fell at a remarkable 35% annual rate in the first quarter of 2001.

But nontrade links between national economies have been getting tighter as well. Take capital markets. Stock markets in different countries have always affected each other, as in the case of the 1987 crash. But with investors moving money across national borders more easily than ever, the movements of stocks in one country are being felt more quickly in bourses worldwide.

This has economic consequences. Weakness on Wall Street, for instance, has pulled down other markets around the world, depriving companies of the money needed for capital spending. The 6% fall in the Standard & Poor's 500-stock index this year has been matched by similar drops in the London, Frankfurt, Paris, and Tokyo stock markets.

EPICENTER. While the U.S. is the epicenter of the tech stock bust, the decline in New Economy stocks has been just as ferocious overseas. The Nasdaq has fallen 14% since the beginning of the year, but the German Neuer Markt is down 39% and the French Nouveau Marche is down 45%, making it far harder to launch startup companies in these countries.

Moreover, the major economies are part of an unprecedented global technological community linked by rapid communications. That means new ideas, such as the Net, can leap across the ocean, stimulating growth. But failures reverberate globally, too. So when American dot-coms bomb, or NTT DoCoMo Inc. announces trouble with its 3G wireless-data handsets, as it did in April, the effects are quickly felt in Europe.

Then there's the factor of global psychology. With U.S. news just a click away on the Internet and TV sets around the world endlessly tuned to CNN and CNBC, pessimism in one country can crop up elsewhere in a way that was never possible before. That may explain why a monthly European Commission survey shows that European business and consumer confidence has been steadily declining since the end of last year--well before the economic data registered a slowdown.

The New Economy is built on global trade, global capital markets, and global communications. Unfortunately, the door swings both ways: Links which propelled growth in the boom may help spread the slump today.

Mandel writes about the New Economy from New York.

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