World
5:03 pm
Fri June 1, 2012

Struggling U.S. Economy Drags Down The World

Originally published on Fri June 1, 2012 5:38 pm

The sputtering U.S. economy isn't just bad news for America, it's a drag on the global economic outlook as well.

"What matters to the rest of the world is the amount of demand the United States is going to generate," says economist Eswar Prasad, a professor of trade policy at Cornell.

"Weak job growth translates to weak domestic demand in the U.S., and that concerns all of the U.S.'s major trading partners," he says.

Prasad is an expert on the economy in China, whose turbocharged economic growth has already slipped this year, in part because of declining demand for its exports in the United States and Europe.

"If employment growth in the U.S. continues to remain weak, it will lead to greater trade tensions with China," says Prasad , noting that politicians in both countries will likely be looking for someone to blame for economic problems.

The value of China's currency, the renminbi, fell in relation to the dollar in May, a sign that China's central bank may be trying to make Chinese exports cheaper and therefore more competitive.

Signs Of Chinese Concern

Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics, says "the weakening renminbi is a clear indication to me that [the Chinese leaders] are worried."

The comparatively low value of the renminbi, also known as the yuan, has been a point of contention between the U.S. and China for years. Some American leaders say China manipulates the value of its currency to keep Chinese goods artificially cheap overseas.

Over the past several years, China has been responding to global complaints by allowing the value of the renminbi to rise, but that policy appears to have been put on hold.

It's not just the Chinese who are paying attention to U.S. unemployment numbers.

"I'm sure that some German economists will be saying this just proves that stimulus programs don't work," says Kirkegaard, referring to those thinkers who believe that European countries need to reduce spending and cut their deficits rather than promote growth.

Worries In Europe

More broadly, Kirkegaard says, he thinks that many pro-growth European leaders will view the U.S. employment figures with alarm, in part because they fear the faltering economy will hurt President Obama's chances for re-election.

"They're not saying so publicly, but they're hoping for an Obama victory," he says, because they believe that GOP challenger Mitt Romney will espouse a far more austere budget, like that proposed by House Budget Committee Chairman Paul Ryan, a Republican from Wisconsin.

Voters in France and Greece resoundingly defeated pro-austerity candidates last month, and governments are now trying to figure out what combination of policies will help resolve the debt crisis.

Meanwhile, the latest jobless figures from the 17-nation eurozone make the U.S. unemployment numbers look tame. The European Union statistics office reported that more than 17 million people were out of work in April, for an unemployment level of 11 percent.

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