An expected retrenchment in China along with weakness in emerging markets severely threatens the U.S. economy and could trigger a global recession, according to the latest analysis from the Jerome Levy Forecasting Center LLC.

“With emerging markets now nearly half of the world economy and most of the developed markets’ economy beyond U.S. borders heavily dependent on EM foreign demand and EM financial stability, the United States faces a global recession that it will be unable to withstand,” said David A. Levy, chairman and economic analyst, in the report. “U.S. export exposure recently hit a record share of [gross domestic product], problems in global credit markets will adversely affect U.S. banks and markets, the American stock market has vast foreign exposure and household spending/saving rates are unusually vulnerable to prices of financial assets.”

Levy’s scenario would have dire implications for fashion apparel retailing as well as the luxury market. Indeed, Levy’s point about household spending and savings being impacted by weakness in financial assets was played out earlier this year when stocks declined over economic woes in Greece and China. IHS Global Insights economists noted the “headline effect” of market crashes on the “paper wealth” of higher-income households, which temporarily pulled back on spending.

Although spending and savings bounced back when the stock markets recovered, it revealed vulnerability, as Levy noted.

Levy’s take on the global outlook is more bearish than what other analysts and economists are seeing. Many forecast a slowdown in growth for the global economy, but not a recession. In the U.S., the Federal Reserve is poised to raise interest rates this month due to strength in the U.S. economy.

Since 2009, the entire global economy has been heavily dependent on the enormous, rapidly expanding investment of the EM economies, but the EM boom is dying,” Levy said. “For years leading up to the recession, two sources of profits were critical to many EMs – the current account surpluses and, especially, soaring investment. However, by 2008, EM exports ran into trouble as EM shares of global markets approached saturation, and DM demand plunged and never recovered to anywhere near its pre-2008 trend.”

Levy added that EM investment continued to surge, and “so did idle capacity, finally slowing investment growth in 2014.” He noted that this year, investment appears to be gradually turning in a number of EMs, thus weakening profits and slowing growth. Levy said developed markets are now “bogged down” by their own balance-sheet issues, and are “now losing exports to the EMs at the expense of their profits.”

With China, Levy sees a “severe retrenchment” on the horizon. “Huge trade surpluses and increasingly fantastic rates of investment have generated great profits [in China], but they have also led to excessive overhead, unused business capacity, and mountains of dubious debt,” he said. “In 2015, China’s economy is decelerating rapidly. Without ever-greater government fiscal spending and ever more involved financial sector support, China will experience by far its most serious recession of the 21st century.”

Regarding other emerging market economies, Levy said Brazil and Russia, “have been in recession all year, and more appear to be turning down with each passing quarter.” Levy said banks can’t make interest rates any lower in EMs since most are close to zero already.

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