Global Fallout From U.S. Recession
The countries that will be hurt the most are first and foremost the closest neighbors of the United States, such as Canada and Mexico. Both Canada and Mexico exports about 25% of their GDP into the U.S. and so a downturn in demand there will have a significant negative effect on their economies, possibly even pushing them into a recession too.
Another highly vulnerable economy is China. China has foolishly pursued a policy of holding down the value of the yuan. This have not just resulted in a slower growth in real income as vast sums have in effect been given away, but it has also significantly increased their vulnerability to a U.S. recession. China's goods export constitutes more than 10% of GDP, which while being far less than Canada and Mexico, is dangerously high.
Moreover, as sentiment in the U.S. Congress is quite sinophobic, it is a virtual certainty that China will be blamed for the recession. Meaning that there is a significant risk that the relatively mild anti-Chinese trade restrictions passed recently could quickly turn much more draconian. At that point, the Schumer-Graham 27.5% across the board tariff bill could actually be passed. This would cause considerable damage to Chinese exports. And unlike the export limiting effects of a stronger yuan, there is no positive side in the form of cheaper imports to compensate for the damage.
As China is the biggest export market for many Asian countries (And Australia, Chris should note!), the dramatic weakening of the Chinese economy caused by this will further add to the direct damage from the U.S. slowdown (and will in fact perhaps be a bigger factor than the direct effect). Therefore, if U.S. politicians respond to the recessions by draconian restrictions on Chinese imports, this means that the Asia-Pacific region could suffer at least as much as Canada and Mexico.
The mayor economic region that would suffer the least from a U.S. recession would be Europe. The European Union exports less than 2.5% of its GDP to the U.S. and its trade with indirectly damaged regions is likewise relatively limited. And with the momentum in European domestic economies being fairly strong, a U.S. recession will probably not have a significant negative effect.
And with strong domestic demand driven by housing bubbles in large parts of the Euro-zone as well as Britain, Sweden, Denmark and the Baltic states, falling demand in the rest of the world combined with a likely continued appreciation of the Euro and other European currencies, Europe will likely experience a dramatic weakening of its current account balance. Europe will therefore likely take over America's role as "consumer of last resort" during the coming year.
In short, the effects of a U.S. recession will be greatest in Canada, Mexico and other countries in Latin America and smallest in Europe. For Europe the effect on growth will be only marginal, although it is likely to have a significant effect on its current account balance. The outlook for China and the rest of the Asia-Pacific region depends on whether or not U.S. politicians introduce draconian restrictions on imports from China. If they don't the effect will not be particularly dramatic, if they do, it will have dramatic effects.