For a time, it looked as though the weakness in the U.S. economy would have limited impact on the solid growth in the rest of the world, which in turn has been providing strong demand for U.S. exports. But now there are signs that the global economy is following the United States into an economic downturn.
A sustained global downturn would complicate efforts to revive the U.S. economy.
The global slowdown, caused in part by the global credit crunch, has sent crude oil prices tumbling from nearly $150 a barrel in late June to about $105 currently, and some analysts believe oil could be headed back down to $80.
Lower oil prices, caused by declining demand and accelerated by a flight of investment capital, might actually help ease economic pain around the world, but only to a limited degree, analysts say.
“Lower oil and gasoline prices will cushion the blow, but I think there’s a lot of other negatives that are not going to be completely offset by oil prices,” said Nariman Bahrevesh, chief economist at Global Insight.
For one thing, oil isn’t the only commodity that saw prices rise and demand increased and supplies got tight. Prices of everything from steel to corn have surged as global growth has spread — especially in emerging economies like China and India. That strong demand, driven by the period rapid growth that is now ending, sparked a round of inflation that has proved stubbornly resistant to government efforts to contain it.
“We are facing inflationary pressure almost all over the world," Rodrigo de Rato, Spain's former minister of finance, told CNBC. “You have more than 50 countries with more than two-digit inflation, something we haven't seen in 15 years. And we're seeing inflationary pressures in the U.S., in Europe, in Canada, in the industrial world."
In addition, there is some debate about how low oil prices will go. Oil analyst Peter Beutel said oil could be headed back to $80 a barrel as investors cash out of the market. But the recent price slide may be tempered by the Organization of Petroleum Exporting Countries' announced plan to cut production.
Higher prices for everything from oil to steel take a toll on economic growth in two ways. First, they raise costs for businesses and consumers around the world. The inflation also has sent interest rates higher in many countries as central banks try to bring the higher prices under control.
(In contrast the U.S. central bank, the Federal Reserve, has been lowering rates in an effort to boost growth, but policymakers have signaled their next move will be to increase rates.)
The higher rates and generally tighter credit is a key factor in the global economic slowdown. After years of easy-money lending, banks around the world have had to tighten their standards as they struggle to overcome losses tied to bad mortgages and related securities.
The United States is not the only country coping with the aftermath of the the easy-money years. Countries like Spain and Britain also are feeling the after-effects of housing bubbles. Other countries are simply feeling the effects of a sharp slowdown in lending and the uncertainty about how much longer losses from bad loans will continue to pile up.
This week's federal takeover of Fannie Mae and Freddie Mac helped removed some of that uncertainty — for now. But the long-term viability of the two giant mortgage companies is still unclear. And the takeover is expected to have little impact on homeowners with existing mortgages who are at risk of default.
Some 9 percent of American households with mortgages are either behind in their monthly payments or in foreclosure. A weakening job market could send even more households into default.
Huge losses from the meltdown of the U.S. housing market left a big hole on the books of the global banking system, which will take more time to repair. Worse, the credit market has widely abandoned the system of “securitizing” loans — from mortgages to credit card debt to student loans — by chopping them up and selling them off too investors.
To the extent that borrowing — especially by U.S. consumers — helped drive the global economy expansion, the loss of that borrowing power is now a major brake on global growth.
“The era of borrowed money is over," said Kathleen Stephansen, chief global economist at Credit Suisse. “The rest of the world was very willing to finance our deficits, and that allowed us to spend and push our saving rates into negative territory. That is no longer the case. “
The process of rebuilding the financial base of U.S. households and lenders has been under way for some time. But until the U.S. housing market stabilizes, that process will likely delay economic recovery.
The slowing global economy adds yet another hurdle to U.S. recovery by weakening demand for U.S. exports.
And since the global economy has only recently begun to weaken, it’s far from clear how long the downturn will last.
“For most countries in the world the shock is coming to them, and it's starting from the U.S.," said Alex Patelis, a global economist at Merrill Lynch. “I think it’s going to take some time for the problems to be resolved.”