The financial crisis is now claiming victims in the “real” economy. Manufacturers around the world are in trouble. Purchasing managers' surveys have shown slowdowns for manufacturers in Japan, the UK, the eurozone and the US. Companies are suffering as the credit crisis hits them, and their customers. As growth weakens across the world, the Bank of England and the European Central Bank must start loosening. But the US Federal Reserve should hold steady for now.
With the economic situation deteriorating, companies across the world had already reduced their discretionary spending. Construction spending and residential and business investment all fell in the UK, eurozone and US in the second quarter of this year.
As the financial crisis has worsened the impact on the real economy has become much worse. Spreads on debt have risen recently such that even triple-A titans are borrowing on onerous terms. GE's deal with the investor Warren Buffett suggests serious concerns about a possible funding squeeze. But policymakers should bear in mind that the nastiest effects of expensive credit will be felt in the coming months by small businesses, which have the fewest borrowing options.
