Sun, Aug 31, 2008 - Page 9 News List

Economic woes and the case for global recession

By Hans-Werner Sinn

From 2004 to last year, the world economy experienced an unusually long and strong boom, with growth rates of nearly 5 percent and with many countries participating.

The EU recorded 2.4 percent growth on average during these years. In Germany, where growth averaged 1.8 percent during this period, some journalists proclaimed a new economic miracle.

Now, however, increasingly bad news is giving rise to serious doubts; dark clouds are hovering over the US in particular. Is the world economy on the brink of recession?

In the US, real-estate prices remain in free fall, and the banking crisis is still claiming new victims (Bear Stearns, IndyMac, First Heritage Bank, First National Bank of Nevada, First Priority Bank, Fannie Mae, Freddie Mac and so on). In the banking world as a whole, expected write-offs now considerably exceed the 400 billion euro (US$588.5 billion) mark projected just last spring.

Unemployment, moreover, is rising at its fastest rate in seven years. Overall employment, which is still high in historical terms, has been declining continuously since the beginning of this year. It is surprising that the US stock market hasn’t crashed yet, since all other indicators are pointing downward. The Standard & Poor’s price/earnings ratio recently stood at around 20, well above the long-term average of around 16 since 1881.

Disturbing signals for the world economy have also come from recent surveys of economic activity. The Ifo World Economic Climate index deteriorated in the third quarter of this year for the fourth consecutive time. That decline was primarily the result of more unfavorable appraisals of the current economic situation, but also reflected another downward revision of expectations for the next six months. Today, the index is at its lowest level since the fourth quarter of 2001.

The cooling of the Ifo World Economic Climate index was particularly marked in Western Europe and Asia. This has dispelled hopes that Asian economic activity could develop separately from that of the US, thereby offsetting European exporters’ losses in the US. In the third quarter of this year, the Ifo index for Asia was at its lowest level since the attack on the World Trade Center in 2001, with particularly poor economic assessments coming from Japan.

In the US, the climate indicator declined again after having sunk dramatically in the second quarter, bringing it to its lowest level since 1991. The University of Michigan’s Consumer Sentiment Index fell in June to its lowest level in decades and has since recovered only insignificantly. Also for the euro area, the Ifo Economic Climate index registered a dramatic decline.

Europe’s largest economy, Germany, is now going into the doldrums. The Ifo Business Climate index, which, though based on a survey for Germany, is regarded as Europe’s most important economic activity indicator, has been falling with few interruptions since the fall of last year. It is now clearly in territory that implies an economic downturn.

In addition, export expectations for German manufacturing are heading south. Incoming orders in manufacturing, the most important indicator in the official statistics, fell more sharply in the first two quarters of this year than at any time since the beginning of 1993. In the second quarter, the German economy shrank at an annualized, seasonally and calendar adjusted rate of 2 percent. All in all, there is now hardly any doubt that the economic upturn in Germany that began in the summer of 2005 is now coming to an end.

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