The global economy is powered by consumer spending, but unfortunately spending levels in both the United States and Europe appear to be either stagnant or declining. After a weak round of holiday sales in the United States this past weekend, the European Union has followed up with a weak report on consumer spending in the three months leading up to September. Consumer spending grew by only .1%, suggesting that the Eurozone’s recovery is fragile and will likely remain weak in the near future.
Cause: stagnant wages, high cost of living
The cause of the slowdown in both Europe and the United States appears to be a combination of stagnant wages and slowly rising living costs. With economies across the West struggling to maintain growth amid budget cuts and increasing efforts to cut costs in both the private and public sector, the economy has remained stagnant. This has restricted hiring and employment mobility, and as wages remain stagnant, so too does discretionary spending.
Consumer spending now makes up 70% or more of the economic activity in many major industrial countries. When consumer spending drops in a country like the United States, the whole economy quickly becomes at risk. Slowdowns in consumer spending can lead to layoffs at manufacturing plants, retails stores, and distribution centers. Restaurants and other consumer service oriented businesses might also be forced to lay people off and cut costs.
Asian countries may not be ‘white knight’ again
At the same time, a drop in consumer spending in developing countries often causes a slowdown in production in countries across Asia and the developing world. Asia was able to act as an engine of economic growth through the last recession, but that might not be the case the next time around. If the United States and Europe slip into recession, or if consumer spending drops substantially, Asian countries may suffer their own recessions, or at least severely restricted growth.
The last recession forced many Asian countries to enact stimulus packages but gradually rising debt levels might mean that such countries won’t be able to afford another round of stimulus. If so, the next economic slow down will be more difficult for Asian countries to buffer against. China is already moving to restructure its economy and to focus on consumer spending, but the actual impact of these efforts might not be felt for years.
In the meantime, the upcoming holiday season will be an important indicator for the global economy. If consumer spending remains stagnant or drops, it could have a major impact on global outlooks. While the economy likely won’t slip into recession in the near future, a weak holiday season could weaken an already fragile global economy.