Stocks sink amid concerns out of China and Europe, continued turmoil in Arab world

By Neil Irwin
Washington Post Staff Writer
Friday, March 11, 2011; 12:00 AM

New concerns about a widening U.S. trade gap and slowing Chinese growth combined Thursday with other signs of economic trouble to undercut some of the confidence about a recovery that has been building.

With the global economy appearing more vulnerable, investors dumped U.S. stocks, sending the Standard & Poor's 500-stock index down 1.9 percent and the Dow Jones industrial average below 12,000 for the first time in more than a month. All of the world's major stock markets were down sharply.

The developments, which also included new worries about Europe's debt crisis and continued turmoil in North Africa and the Middle East, painted a picture of a world economic recovery that is menaced from all directions.

"The sell-off today is really about people saying maybe the growth picture isn't as bulletproof as we thought," said Jim McDonald, chief investment strategist at Northern Trust.

Economists have become increasingly confident over the past few months that 2011 would be a year of steady, if uneven, recovery in the global economy. Just Friday, the U.S. Labor Department reported solid job creation in February. The International Monetary Fund has forecast that the world's economic output will increase 4.5 percent this year and that developed nations will hike their output by 2.6 percent.

The latest economic news is not enough to deflate that optimism. The U.S. stock indexes fell just enough to knock the market back to early-February levels, showing that investors are still reasonably upbeat. Still, Thursday illustrated the variety of risks facing the world economy, any of which could undermine global growth.

"Growth in the first quarter will be much weaker than many had forecast," said Diane Swonk, chief economist at Mesirow Financial, citing the weaker trade data and bad weather in January.

In the United States, the trade deficit widened to $46.3 billion in January, up from $40.6 billion in December. That was far more than analysts had expected. While U.S. exports rose, imports rose faster, with particularly large increases in imports of automobiles and other long-lasting products.

The numbers for February, which are to be released next month, could show the trade deficit widening further, because those figures will take into account the steep run-up in fuel prices in recent weeks.

Also Thursday, the Labor Department said the number of people filing new claims for unemployment insurance benefits rose to 397,000 last week, from a revised 371,000 the previous week. While the uptick was greater than analysts expected, it occurred during a week when many schools were on spring break, which can distort numbers.

New data out of Beijing, meanwhile, shows that China's gangbusters growth, which was barely touched by the global recession in 2008 and 2009, may be slowing. Exports, which have long driven China's economy, rose only 2.4 percent in the year ending in February, the Chinese government said.

Those results were distorted by the Chinese New Year, according to analysts, but led investors to fear that the economic juggernaut could be losing momentum. With China an engine of global growth, any slowdown there could be bad news for other economies.

In Europe, meanwhile, the euro fell against the dollar amid reminders that debt problems confronting many European nations remain unresolved. Moody's downgraded Spanish debt, chiding Spain's regional governments for failing to make needed cuts in their budget deficits, and the Spanish central bank said many of the country's financial institutions need to raise more capital.

While the sense of crisis in Europe has waned, challenges remain. Bond investors on Thursday demanded 5.5 percent interest from the Spanish government to lend it money for 10 years, far above the 3.2 percent rate that applies to Germany, which is in better financial health.

"Europe is a ticking time bomb," said Desmond Lachman, a resident fellow at the American Enterprise Institute. "The underlying problem is that countries on the periphery like Greece, Ireland and Portugal have solvency problems, and the efforts to solve it by cutting budgets is driving those countries deeper into recession, which causes them to lose the political will to make cuts."

European leaders are to meet at a summit in Brussels beginning Friday, and financial markets have been hoping they reach an agreement on committing more money for the financial rescue of troubled European nations. That progress will be difficult, however, because bailouts are immensely unpopular in Germany, Europe's largest and most influential economy.

Turmoil in the Arab world, meanwhile, continues to pose perhaps the most dangerous threat to the world economy. The price of oil fell Thursday, with West Texas Intermediate Crude falling $1.68 to $102.70 on signs of slower growth in China.

However, there were more reminders of political instability in the Middle East, including media reports of shots fired at a protest in Saudi Arabia, the world's largest oil exporter. Any disruption of the Saudi supply could spark a steep rise in oil prices, analysts said.

President Obama is scheduled to discuss rising energy prices at a news conference Friday morning.

Despite the risks, many analysts remain generally optimistic.

"There is a steady global expansion underway," said McDonald, of Northern Trust. "These things tend to be pretty durable."

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