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Still, unless Congress and the White House reach an agreement by year’s end, federal taxes will jump and deep spending cuts will kick in. Should that happen, the Congressional Budget Office says, the economy would likely fall into another recession.
Given the size of the U.S. economy, further weaknesses could worsen the slowdowns in European and Asian countries that depend on sales to American consumers.
Unemployment in the 17 countries that use the euro is already at 11 percent, the European Union’s Eurostat office reported Friday. It’s the highest rate since the euro was introduced in 1999.
European countries have been struggling with their debt crisis for three years. Three nations — Greece, Ireland and Portugal — have already required bailouts because of unsustainable levels of debt.
Austerity has been the main prescription for the crisis. But spending cuts and tax hikes are causing economies to shrink across the eurozone.
In a blunt warning, European Central Bank chief Mario Draghi last week called the existing setup of the euro single currency "unsustainable" without stronger political and financial ties among eurozone countries.
The fear is that Greece will drop the euro, and other weak countries, such as Spain and Portugal, will be forced to follow. Financial chaos could rage across Europe.
Spain is facing punishing borrowing costs on bond markets because investors fear it won’t be able to pay its debts. Prime Minister Mariano Rajoy declared Saturday that his government will stick with harsh austerity measures as long as necessary.
But Spain’s unemployment is already 24.4 percent. For those under age 25, unemployment is 51.5 percent. Businesses are being crushed.
"This shop has been here for close to 100 years, and I’ve worked here for 48 years," says Manuel Cabrejas, a salesman at a cushion store in Madrid whose shop windows were covered in signs saying, "Closing down sale, big discounts, everything must go."
"For the last two years, we have only just been covering running costs," Cabrejas said. "It’s time to let go."
ASIA AND SOUTH AMERICA »
Since the global recession ended in 2009, the world economy has been fueled by rising powers in the developing world led by China, India and Brazil.
Now, all three are running into trouble.
China’s manufacturing weakened in May, according to surveys out Friday. Factory output was the weakest in three months.
Some economists say China’s economic growth will fall to an 8 percent rate in the April-June quarter. That’s high by Western standards, but it would be the weakest growth for China in nearly three years. In response, China is rolling out an economic stimulus program.
Having rebounded strongly from the recession of 2007-2009, China’s economy grew a sizzling 10.4 percent in 2010 and 9.2 percent in 2011. For the past two years, it’s helped drive global growth. Australia and other Asian countries have come to rely on Chinese markets for their exports.
India is suffering an even sharper slowdown. Its economic growth slowed to a 5.3 percent annual rate in the January-March quarter, the lowest in nine years. Output from India’s factories has declined. Its consumers have seen inflation — which has averaged 9.2 percent a year since the start of 2010 — devour their wages.
"It’s beyond anything that we would have imagined," said Samiran Chakraborty, head of research at Standard Chartered in Mumbai. "Real wages are falling ... The consumption slowdown along with the investment slowdown has been a double-whammy for the GDP number."
As recently as last year, Indian politicians were claiming their economy could rival China’s and surge into double-digit growth, lifting hundreds of millions out of poverty in the process.Next Page >
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