Although U.S. equity markets were closed today in celebration/recognition of the life and accomplishments of Martin Luther King, Jr., foreign equities markets were not. It was a wild day for equities across the globe (see European, Asian Markets Plunge), and stock futures are pointing to an equally wild day for U.S. equities tomorrow (see U.S. Stock Futures Point to Major Decline on Re-open).

So what should we make of the synchronized activity across markets? Well, consistent with my post from Friday (see Executives Not Optimistic About 2008), I think market participants around the globe are starting to come to terms with the fact that a recession in the U.S. will lead to a more general slowdown across economies far and wide. Why? Because the U.S. still accounts for the lion’s share of global economic activity (25% of global GDP), and the world is just too interconnected for it not to happen. As I mentioned in my previous blog, spillovers from the U.S. economy to foreign economies have happened through consumption (e.g., declines in U.S. consumption of U.S. final goods leads to declines in consumption of foreign intermediate goods). Likewise, domestic consumption of foreign goods is impacted by exchange rate fluctuations (i.e., a weak U.S. dollar leads to decreased demand for foreign goods). And while I do believe that there will be something of an export substitution effect (i.e., accompanying the U.S. dollar weakness will be an increase in foreign demand for U.S. goods), I believe that the decrease in U.S. consumption will swamp any increased demand for U.S. goods from abroad. Finally, it is not only U.S. banking and financial institutions that have suffered as a result of the credit crunch, but foreign banking and financial institutions as well – e.g., first in Europe, and gasp, now in China too (see Bank of China May Report Subprime-Related Write-Down, hat tip Calculated Risk)!! For this reason, we should expect money to become tighter across many markets – and consumer and business borrowers to feel the pinch as a result.

Now again, I’m not a macro-economic specialist; therefore, I would call your attention to some of those who discuss these issues with greater precision (Krugman, Setser, Roubini, and others in my blogroll). However, I do study firm-level strategy and performance. And privately, I’ve been hearing from executives at various corporations that this economic slowdown looks different to them than the most recent slowdowns they recall (1990-1991; 2000-2002). They have suggested that in this particular crisis they are being hit on both sides of the ledger at once – from consumers who are tapped out, and with little discretionary income left to spend; and from financial institutions that are reticent to lend, making things more tenuous from an operational/investment perspective (see Earnings Won’t Bail Out Market This Time). As I’ve pointed out on this blog, I expect this crisis to spread from U.S. financial, housing-related (durable goods inclusive), and retail firms more broadly across businesses in many U.S. industries. I think we can now safely add another prediction – expect those spillovers to extend to financial and non-financial, housing and non-housing, and retail and non-retail firms in foreign countries.

This entry was posted on Monday, January 21st, 2008 at 12:19 pm and is filed under Business Strategy, Corporate Strategy, International Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.