The World In Economic Peril
The year 2009 can be paired with 1931 as the second year after the start of a big recession, but the question facing the world now is whether we can avoid a repeat of the vicious spiral of depression that took root then and find an alternative way forward.
Some lessons appear to have been assimilated: notably that in a depression, too much and too early is safer than too little and too late. The Americans plan a $700bn fiscal stimulus, the Chinese are spending $584bn to shore up their economy, and policy-makers worldwide are at least paying lip service to the dangers of protectionism.
Yet no one should underestimate the extent of the threat. A year ago, we were looking at a US downswing, an occasional bank failure and rapidly increasing oil prices. Our economic worries now are much more deep-rooted.
Weakness can be seen everywhere - from China to Chile, from Switzerland to South Korea. It looks as if global output will shrink this year - an extraordinary development in the modern era.
This global downswing is partly trade-related: the manufacturing nations of the East have been hit hard by plummeting demand in the West. But it is mostly being driven by the spreading tentacles of the credit crunch.
Many emerging economies were dependent of inflows of loans from the Western banking system. Those flows are now drying up, as indeed are the emerging markets’ economic prospects. What happens in China may well determine the world’s prospects.
By Western standards, growth - projected to fall to 7.2% this year - is still licking along, but with factories closing and unemployment rising, there are signs of social unrest.
The big fear is that the Chinese government will choose to prop up its exporters by allowing the yuan to depreciate, thus bolstering its already huge surplus and aggravating existing imbalances with heavily indebted countries such as the US - with dire consequences for the world economy.
The danger is extreme. In Barack Obama, the US has a new president with vast political capital, but it is not strong enough to rescue the world economy on its own. It needs helpers, particularly in the surplus countries. If China pursues the depreciation route, the outcome could be a devastating round of beggar-my-neighbour devaluations plus protectionism, as was seem in the 1930s.
The world has changed and so must global policy - and quickly. Welcome to 2009, a year in which the fate of the world economy will be determined, maybe for generations.