Global Markets Tumble

Looking at the way the markets have plummeted, it appears an old adage rings true: "When the US sneezes, the rest of the world gets a cold."

Panic spread across the Frankfurt trading floor on Monday, Jan. 21, when the country's DAX index experienced its biggest plunge since the Sept. 11, 2001 terrorist attacks in the United States.

Fears of a US recession, partly sparked by the recent credit crisis, and the possibility that it could lead to an international economic crisis also sent other European and Asian into nose dives.

Over-sensitivity of markets?

Yet, despite the panic, a majority of finance experts estimate the likelihood of a US recession at only 40 percent. Economists at German banks including Dekabank and WestLB assess the situation even more modestly, believing that a recession risk stands at only 25 percent.

Some analysts also point to a University of Michigan consumer confidence reading for January, which last week stood at 80.5 percent, up from 75.5 percent in December. This has led some to believe that consumer sentiment -- which helps to drive markets -- is up despite fears of a recession.

But Jörg Krämer, chief economist at Commerzbank, stressed the complexity of the situation.

"We expect the US economy to stagnate in the first half of 2008, which will feel like a recession," he said.

Huge growth on Chinese and Indian markets

Other economic analysts have said that even if the US economy were to shrink, the rapidly expanding markets of developing countries in Asia could offset a recession in the US, or at least minimize its effects. After all, consumer growth rates in Hong Kong, China, Thailand, Malaysia and India tally up to 15 percent of the global economy.

"The US economy is no longer as important for the world economic situation as it used to be," said Dutch World Bank economist Hans Timmer.

But Krämer -- and others -- remains skeptical.

"To be able to compensate for a US recession, growth in China would have to pick up even more," said Gabriele Widmann, a Dekabank analyst for the US market, adding that such growth would be difficult as the US is an important destination for Asian goods.

Budgets and companies feeling the credit squeeze

Pessimists therefore fear that decreasing US demand for Asian products could prompt a "domino effect." Should American consumers lose their desire to buy, the dominos in the markets so dependent on exports to the US could start to tumble.

"If growth of the US economy slows by one percent, business activity in Germany likewise slows by a half percent," Krämer said.

Furthermore, American financial market policies do not necessarily instill hope. US Federal Reserve Bank chairman Ben Bernanke may have repeatedly lowered the prime interest rate since the mortgage crisis in the US erupted last year, but the lowered interest rates do not have the desired effect where they are most needed. Interest rates on the corporate bond and consumer credit markets have remained the same or have even risen.

Also, a multi-billion-dollar proposal by US President George W. Bush last week to temporarily cut taxes and implement other measures to fend off a possible recession has failed to calm the financial mood.

US business activity, after all, has often proven to be resistant to politics. The Wall Street Journal recently summarized it as such: "We have tried tax breaks before. They don't work."

Dekabank economist Widmann is also certain: "The plan will just be a flash in the pan. It would only relieve the situation short-term."