Financial contagion from Europe is pushing global economies towards the brink, and the risks of slipping into worldwide recession are rising significantly.
China's exports have plunged to half their year-ago levels. Factory orders in Germany, Europe's economic powerhouse, are slumping as China weakens. Australia and Indonesia have cut interest rates to ward off damage from Europe, while Japan, Britain and Brazil have slashed their growth forecasts.
From Beijing to Washington and Sao Paolo, top financial officials are worried their economies will be sucked into the maelstrom by Europe's inability to unify around a debt strategy.
High yields on Italy's and Spain's sovereign debt, hovering around 7 percent, are putting severe funding strains on banks, infecting the global financial system, which in turn undermines confidences and upends growth.
It's a scary situation, said Mike Feroli, chief U.S. economist for JPMorgan Chase.
Unless Europe really goes pear-shaped, we should avoid recession. But each passing week without a resolution we are doing more damage, and it's hard to see how this will stop.
On top of Europe's woes, add an intractable U.S. Congress fighting over how to cut the U.S. budget deficit, and the risks are mounting of political mishaps that upset a gradual healing of the global economy.
It is stunningly easy to slip into recession, said Tom Porcelli, U.S. chief economist at RBC Capital Markets.
U.S. lawmakers face a Wednesday deadline to deliver a plan to slash $1.2 trillion (759.3 billion pounds) to $1.5 trillion from the U.S. budget deficit over the next 10 years. Porcelli is concerned that failure to reach an agreement, which looked increasingly likely, would cause lawmakers to backtrack and attempt to push through a new law to repeal the automatic triggers to impose budget cuts. Such a move would stoke financial volatility and worsen an already vulnerable outlook.
Additionally, Congress has not yet decided whether to extend several fiscal stimulus measures next year. JPMorgan Chase estimates an end to measures such as the payroll tax cut, unemployment benefits for the long-term jobless and infrastructure spending would take 1.5-2 percentage points off U.S. growth next year - an expectation that most forecasters have already built into their outlooks.
A budget debacle would strike a blow after recent economic data from the United States that has been moderately encouraging. New car sales rose a healthy 7 percent last month, industrial output has been climbing and jobless claims have been falling steadily. U.S. consumers, who drive about 70 percent of U.S. economic activity, have been slowly paying down debt, restoring household spending power as inflation ebbs.
Personal income data for October, to be released on Wednesday, is expected to show a rise of 0.3 percent up from 0.1 percent the prior month, and jobless claims out the same day are seen holding below the critical 400,000 level -- both of which would support further spending and point to fourth-quarter GDP growth near 3 percent.
Europe also has some underlying strength. Corporate cash flow is high and inventories low, giving plenty of room to ramp up should demand recover. Likewise, Germany has low unemployment, solid public finances and cheap financing that can support an expansion in German domestic demand.
But political uncertainly and financial volatility is casting a huge shadow over the outlook, depressing economic activity both in Europe and the United States and spilling over to export-driven Asia.
Flash estimates for PMI purchasing managing indexes on Wednesday will gauge China and Europe's manufacturing and service sectors in October. The euro zone factory index is seen slipping closer to recessionary territory at 46.5, down from 47 in September. Many analysts see the region already in recession.
As for China's PMI index, it was getter close to stalling in September at a reading of 51, just above the 50-point level that demarcates expansion and contraction. Stephen Roach, non-executive chairman of Morgan Stanley Asia, said the combination of weak consumer demand from the United States and slumping Europe should be setting off alarm bells in export-led Asia.
For the second time in three years, global economic recovery is at risk, Roach said in a note to clients.
(Editing by Leslie Adler)