Wall Street plunged Tuesday after investors feared weak data from China, the world’s second-largest economy, would lead to a global recession.
China’s manufacturing sector suffered its quickest deterioration in over six years, leading to a three-year market low and other sectors of the Chinese economy also slowed down significantly.
In response, all three major U.S. stock indices, the Dow Jones, the S&P 500 and NASDAQ, were down two percent in early trading.
“While a measure of calm has returned to these markets recently and they have seen relief rallies, many of the underlying negative fundamentals are still in place,” said Nariman Behravesh, chief economist for IHS. “As a result, the downside risks for most commodity prices, exchange rates, and stock markets are likely to persist for some time, while growth in many parts of the world, especially in emerging markets, is likely to deteriorate further.”
Investors panicked once China’s official manufacturing Purchasing Managers’ Index (PMI) dropped to 49.7.
“The PMI was below 50, which is a psychologically important level and puts into real focus the fact that China is contracting,” said Joe Rundle, a senior sales trader at ETX Capital. “With the weak data coming out, we’re going to see the negative sentiment from the last few weeks continuing.”
This pessimistic outlook may become self-fulfilling.
In fact, Canada has already fell into a recession after its economy retreated 0.5% in the second quarter and 0.8% in the first.
“Canada’s manufacturing sector continues to face growth headwinds from heightened global economic uncertainty and sharp falls in energy sector capex plans,” said Cheryl Paradowski, president and chief executive officer of SCMA.
Collapsing oil prices have also hurt Canada, which is the world’s fifth-largest oil producer.
The decaying conditions in Canada and China could trigger a global recession.