What Is the Spillover Effect?
Let me explain the spillover effect directly: it's the impact that seemingly unrelated events in one nation can have on the economies of other nations. While there are positive versions, I usually hear the term applied to negative impacts from domestic events on the rest of the world. Think about recent examples like natural disasters or stock market crises, among other major events.
Key Takeaways
Here's what you need to know: a spillover effect happens when an event in one country creates a ripple on the economy of another, often a more dependent one. These can stem from stock market downturns, like the Great Recession in 2008, or macro events such as the Fukushima disaster in 2011. Some countries get a cushion because they're seen as 'safe haven' economies, where investors move assets during downturns.
How the Spillover Effect Works
Spillover effects are a form of network effect that have become more common with globalization in trade and stock markets, which has strengthened financial ties between economies. Take the Canada-U.S. trade relationship as an example—I'm pointing this out because the U.S. is Canada's main market by far in almost every export sector. A minor U.S. slowdown gets amplified due to Canada's heavy reliance on the U.S. for growth.
For instance, if consumer spending drops in the United States, it creates spillover effects on economies that count the U.S. as their biggest export market. The bigger an economy, the more spillover it tends to produce globally. Since the U.S. leads the global economy, nations and markets can easily be influenced by its domestic issues.
Important Considerations
Most of the world feels significant spillover effects from downturns or major events in the two largest economies: the United States and China. Since 2009, China has become a key source of these effects too. Chinese manufacturers have fueled much of the global commodity demand growth since 2000. As China ranks as the world's number two economy after the U.S., more countries now experience spillovers from a Chinese slowdown.
When China's economy slows, it affects worldwide trade in metals, energy, grains, and other commodities, causing economic pain globally, though it's worst in Eastern Europe, the Middle East, and Africa—these regions depend on China for a larger share of their revenue.
Special Considerations
There are unconnected economies that experience very few spillover effects in the global market, but such closed-off systems are rare. Even North Korea, nearly sealed from world trade in 2024, has started feeling spillovers from occasional Chinese slowdowns.
No matter how strong, developed countries remain vulnerable to spillover effects, especially from major economic events. Japan, the U.S., and the Eurozone have all dealt with spillovers from China at times. When global markets shake, investors might shift funds to insulate against these effects, leading to positive boosts in safe-haven markets.
You saw this with U.S. investment inflows during the EU's Greek debt crisis in 2015. When dollars flow into U.S. Treasuries, yields drop, lowering borrowing costs for American homebuyers, borrowers, and businesses—this is a positive spillover from a U.S. consumer's view.
What Is a Spillover Cost in Economics?
Similar to spillover effects, spillover costs—often called negative externalities—are costs borne by third parties outside a transaction without their consent or compensation. Pollution is a classic example. Consider a livestock facility: nearby residents, not involved in the trade, might still face costs like bad odors or contaminated water.
What Causes Spillover Effects?
Many factors and events can trigger spillover effects. With global interconnectedness, few major phenomena avoid causing them. Key sources include economic downturns, supply chain disruptions, geopolitical crises, and natural disasters.
What Is Wage Spillover?
Wage spillover involves effects from wage changes, which could lead to increased consumer spending, inflation, employment shifts, or changes in local tax revenue.
The Bottom Line
Spillover effects are the indirect economic impacts that countries or regions face from shifts or events in other places. Thanks to globalization and market interconnectedness, it's unusual for any economy to be fully insulated. Mostly, the term points to negative knock-on effects, but positive ones can happen too.
Other articles for you
The Asian Development Bank supports economic growth and cooperation in the Asia-Pacific region through various financial and advisory services.
Operational risk involves potential losses from inadequate internal processes, people, systems, or external events in a company's daily operations.
The Group of Seven (G-7) is an intergovernmental organization of major developed economies that addresses global economic and monetary issues.
Legal separation allows married couples to live apart while remaining legally married, offering an alternative to divorce with specific benefits and obligations.
A factor is an intermediary that buys a company's accounts receivables to provide immediate cash, minus fees, improving short-term liquidity.
The MICR line on checks uses magnetic ink to encode routing, account, and check numbers for automated processing and fraud prevention.
Intrapreneurship empowers employees to innovate like entrepreneurs within their company, fostering growth and creativity without personal financial risks.
Erosion in business refers to the gradual negative impact on profits, sales, or assets over time.
Due diligence is the thorough investigation and verification of information to assess risks before committing to investments, transactions, or decisions.
The Harmonized Index of Consumer Prices (HICP) is an EU inflation measure tracking household price changes for goods and services.