06/14/2012 09:13 am ET Updated Aug 14, 2012

The Global Economic Slowdown

The economic data gleaned over the past few weeks conveys a sense of foreboding about the health of the global economy. The likelihood of a global recession has increased significantly because now, in addition to the worsening euro crisis, we see a sharp slowdown in job creation, retail sales, manufacturing, and economic growth in the United States, China, India, and Brazil.

Of all these worrisome trends, the big enchilada is the worsening economic crisis in Europe which has moved from concern about excessive sovereign debt to spreading recessionary conditions across the continent to a major liquidity crisis in the Spanish banks. Spain has over $280 billion in delinquent debts associated with real estate loans that have gone bad, leaving Spanish banks with marginal capital and liquidity to sustain economic development.

When a nation's banking system craters, the overall economy soon follows. Some would argue that several big Spanish banks are effectively bankrupt. To further complicate the picture, unemployment in Spain is about 22 percent, and much higher for younger people. Consequently, capital has been fleeing Spain for havens in Germany and the United States. One result has been a spike in Spain's borrowing costs which have been above 6 percent for several weeks. The much-ballyhooed loan package for Spain announced last week was insufficient to calm European bond markets. In fact, Spanish bonds were downgraded again yesterday.

The other great economic engines of the world are sputtering. The manufacturing PMI in China declined for the third straight month. Brazil showed virtually zero growth in the first quarter of 2012, and economic growth in India dropped from 8 percent to 5 percent. The United Kingdom has also turned to negative growth.

Back in the United States, we have seen the manufacturing index in durable goods drop in May and first quarter GNP revised down to 1.9. The U.S. payrolls report for May showed only 69,000 new jobs for the month, against expectations of twice that, and the employment rate rose from 8.1 percent to 8.2 percent. It's clear that U.S. exports and employment are being adversely affected by the recession in Europe and other parts of the world.

The global slowdown is underlined by what we've seen in both equity and bond markets. Equity prices have been under substantial downward pressure. More evidence that the recovery is losing momentum is found in the fact that the 10 year bond yields fell to 1.45 percent in United States, 1.44 in the UK, and 1.43 in Germany. There has been a flight to safety as many global players fear that another recession is on the horizon, but in the present environment, safety is an elusive commodity.

We can expect further quantitative and credit easing to take place in the UK, China, and the Eurozone, but our experience does not suggest it will help much. The crucial problem is not a shortage of money, but rather a monstrous overhang of public and private debt that undermines confidence and discourages consumption. There do not seem to be any easy short term solutions for deleveraging a global economy overextended in debt.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.