It is well known that the present economic difficulties originated, to a large extent, in the United States. It was in August of 2007 when the subprime crisis made its appearence in the US, and after that we have seen housing prices drop, a credit crunch, and several uncertainties regarding how long this financial, and real, crisis will last. It is true that other countries in the world had gone through patterns that were similar to those in the United States. In particular, countries such as the UK, Ireland or Spain, among others, had been going through a house price boom in recent years. But the subprime market was not as large as that in the US, nor all countries were involved. Japan or Germany, for example, had not gone through a house price boom.

So the natural thing to think would be that the US would suffer the most because of the bursting of the bubble, maybe together with some European countries that had gone through a similar process, while the effect on others would be smaller. Recent data for the second quarter of this year shows that this is far from true. In fact, growth rates for most European countries and for Japan have been significantly lower than the growth rate of the US, and this is just a sign of how interelated countries are and how the effects on the real economy can move fast across the world.

While we are still waiting for data for a few countries, we can see a clear pattern of fast slowing down of the largest European economies and of Japan. Germany, France and Italy all saw their GDP’s fall during that period. As an example, in Germany GDP fell 0.5 % when compared to the first quarter of 2008. When annualized, this would imply a decrease of 2% in GDP at an annual rate. Instead, if we compare the GDP of the second quarter with the GDP of the same quarter of 2007, the growth rate is a positive 1.7%. But this is showing that conditions are worsening. Right now it is expected that Germany will grow in 2008, when comparing the whole year of 2008 with 2007, but this remains to be confirmed as conditions are changing rapidly. In France GDP fell 0.3% in the second quarter, for an annualized rate of -1.2%.

For Italy the annual rate is -1.1%. Among the largest countries in Europe only Britain, with 0.8%, and Spain, with 0.4%, show positive annualized growth rates, but the slowdown is very strong when compared to the first quarter of this year. Finally, on the other side of the world, Japan, the second largest economy in the world, saw its GDP decline by 0.6 % in the second quarter. When annualized this would imply a decrease of 2.4%.

The US, instead, is growing at an annualized rate of 1.9%. This is clearly weak growth, but it is growth after all. This may be explained to some extent by the economic policies that have been applied in different countries, but it is also explained by the greater vulnerability of smaller, more open economies, to a world slowdown. Europe and Japan depend more strongly on exports for their growth, and a decrease of purchases from the US -and from other countries given the global character of the slowdown- affects their economies in a very important way.

Finally, expectations always play an important role in both consumer and investor behavior, and Europe and Japan have seen expectations fall at a very rapid pace in recent months. With all these factors in place we will have to wait to see who will get pneumonia first.