What Is the Spillover Effect?
The term “spillover effect” describes the influence that events in one country that seem unconnected may have on the economies of other countries. The phrase is most often used to describe the detrimental consequences a domestic catastrophe, such as an earthquake, stock market crisis, or other macro event, has on other regions of the globe, even while there are beneficial spillover effects.
How the Spillover Effect Works
One kind of network impact that has been more prevalent since trade and stock market globalization strengthened financial ties between nations is spillover effects. Spillover effects may be seen in the commercial relationship between the United States and Canada. The United States dominates Canada’s primary market in almost every export-oriented industry. Canada’s dependence on the U.S. market for its growth makes the impact of a little downturn in the U.S. market worse.
For instance, countries that rely on the United States as their primary export market would be impacted if consumer spending fell. An economy’s propensity to have ripple effects across the global economy increases with size. Given that the United States leads the world economy, domestic unrest can quickly affect markets and other countries.
When there is a downturn or macro-impact in the two biggest economies in the world, China and the United States, most of the globe is affected.
China has also been a significant source of spillover effects since 2009. This is because, since 2000, Chinese manufacturers have accounted for a large portion of the rise in global commodity demand. Since China’s economy is now the second-largest in the world after the United States, a recession in China would considerably impact many other nations.
A recession in China’s economy directly affects global commerce in commodities, including cereals, oil, metals, and many more. Much of the globe suffers economically, but Eastern Europe, the Middle East, and Africa suffer the most since they depend more heavily on China for their income.
Particular Points to Remember
Disconnected Markets
Certain nations are relatively spared regarding the global market’s spillover effects. These closed-off economies are becoming more unusual, as even North Korea, whose economy was almost completely cut off from international commerce in 2019, has started to see the knock-on effects of China’s sporadic slowdowns.
Safe-Haven Markets
No matter how powerful the spillover effects are, a few developed economies are susceptible to certain economic phenomena that may overrun them. For instance, China has spillover effects on the U.S., the Eurozone, and Japan, but these advantages are somewhat counterbalanced by investors escaping to their respective markets during market turbulence.
Likewise, when one economy within this group of safe havens has difficulties, investments often flow to one of the remaining safe havens.
This impact was seen in the U.S. investor inflows related to Greek debt during the 2015 E.U. crisis. The yield decreases along with the cost of borrowing for American consumers, companies, and homeowners as money flows into U.S. Treasury bonds. As seen from the standpoint of a U.S. customer, this is an example of a beneficial spillover effect.
Conclusion
- When an incident in one nation has a knock-on impact on the economy of another, often one that is more dependent, it is referred to as the spillover effect.
- Events like the Fukushima accident in 2011 or stock market downturns like the Great Recession in 2008 may have spillover consequences.
- As a result of their reputation as “safe haven” economies—where investors stash money during downturns—some nations are spared the spillover effect.
