economic contagion

Economic contagion refers to the spread of financial instability from one country, sector, or institution to others, similar to how a virus spreads. When a significant economic problem occurs—such as a bank failure or a debt crisis—it can cause investors to lose confidence, leading to reduced investments and withdrawals. This fear and uncertainty can then ripple through global markets, impacting other countries and financial institutions, even if they are not directly involved. Ultimately, economic contagion can cause widespread downturns, highlighting how interconnected and sensitive the global economy is to localized shocks.