Washington: The world may be heading for its worst recession in a quarter of a century—if it’s lucky. A steep slump looks likely as the credit squeeze crunches economies from the US to Singapore and panic engulfs global financial markets.
Worried: Investors react as they watch a display showing stock prices in Hong Kong on 10 October when the key Hang Seng index fell 7.2%. Vincent Yu / AP
“It’s certainly going to be the worst since the 1980s,” says Bradford DeLong, an economics professor at the University of California at Berkeley who worked at the US treasury department from 1993 to 1995. “The hope is that it won’t become the worst unemployment business cycle since the Great Depression.”
Of special concern: The two big bulwarks of the global economy in recent years—US consumer spending and the rapid growth of emerging markets—may be finally giving way in the face of the 14-month-old turmoil.
That raises the odds that the coming economic decline will be long and deep, despite US treasury secretary Henry Paulson’s $700 billion (Rs33.7 trillion) rescue plan, similar efforts by European leaders and the coordinated interest rate cuts engineered by US Federal Reserve chairman Ben Bernanke and other central bankers.
“This is the worst crisis I’ve seen in my 50-year career,” William Rhodes, senior vice-chairman of Citigroup Inc. in New York, told fellow bankers in Washington on Sunday. “We still have to deal with the effects on the real economy here and elsewhere.”
Slowing growth
The International Monetary Fund’s (IMF) World Economic Outlook last week forecast that global growth will slow to 3% in 2009, from 3.9% this year and 5% in 2007. That would mean a world recession under the fund’s informal definition—growth of 3% or less—although current IMF chief economist Olivier Blanchard declined to describe it as such.
One of his predecessors wasn’t so shy. “It’s hard to imagine it not being the worst recession in at least 25 years,” says Kenneth Rogoff, who is now a professor at Harvard University in Cambridge, Massachusetts.
“You can take most of the official forecasts for 2009 and knock two” percentage points off them, he adds. That would make it the worst slump since 1982, when the world economy grew 0.9%.
“We’re heading into a global recession,” Simon Johnson, also a former IMF chief economist and now a senior fellow at the Peterson Institute for International Economics in Washington, said last month.
Pressures of rate cut
Even if the financial markets settle down soon, the deepening decline will put pressure on central bankers to cut interest rates further and on finance ministers to reduce taxes and boost spending.
“There will be more cuts out of all of the central banks,” says Ethan Harris, economist at Barclays Capital in New York. “We are looking at a global recession, and it isn’t going to turn quickly.”