Monday, October 1, 2007

Effect of US recession on Japan and China

What Would be the Effect of a US recession on the Japanese and Chinese economies?

With the US heading towards recession, or at least a marked slowdown in growth. There are concerns about how much a US recession would effect the rest of the global economy.

1. Exports To US.

32% of Chinese Exports go to the US. If there was a slowdown in US consumer spending this would adversely affect the Chinese manufacturing industry.
23% of Japanese exports go the the US, in particular the automobile industry is heavily reliant on the US economy.
The Export sector are crucial to both Japan and China.

2. Japanese subsidiaries in the US.

Many Japanese firms have subsidiaries in the US. These subsidiaries would be directly affected by a US recession. It would mean that the main companies would have less potential to invest, because their profits are lower.

3. Global Confidence.

Although the US economy is less important than in the past, a US recession would still have a major impact on economic confidence around the globe. In particular a US recession may lead to lower European growth which will harm both China and US.

Reasons not to Be Worried About US Recession

1. Inflation.

The Chinese economy is growing too fast. It is close to overheating, therefore, a slowdown in exports to the US, may help to reduce inflationary pressures.

2. Chinese Middle Classes.

Global economic growth is becoming less dependent on the US consumer. There is a growing Chinese and Indian middle class, which provides a new potential for the purchase of manufactured goods.

3. Helps to reduce global trade imbalances

The long period of US growth has been at the expense of a deterioration in the US current account. US growth has been financed by borrowing from China and Asia. A slowdown in the US economy would help to rectify this growing imbalance.


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