Fears of a new Great Depression have been real since the collapse of Lehman Brothers a year ago, but those fears are beginning to fade as the global economy is pulled out of the depths of recession with the help of massive government intervention.
Things haven’t really gotten that dire, and economic forecasters believe the economy is already growing again after what may be the worst recession on record since the Great Depression of 1929-1933, but it’s nowhere near the second-worst.
Cross-border trade between countries is showing renewed vigor, regular business surveys have suggested a stabilization since March, sparking a stock market surge, and now forecasters such as the OECD say the economic downturn may be nearing an end.
Marc Touati, head of economic research at French financial services brokerage Global Equities, argues that fears of a repeat of 1929 will soon join SARS and the Y2K computer bug in the annals of economic disasters that never happened.
But there is a big problem: the economy is only recovering thanks to trillions of euros of central bank and government intervention and remains dependent on its official life support.
The next challenge will be when and how quickly to remove the fiscal and monetary stimulus that staved off the recession, and how to do so without fueling a resurgence or excessive inflation.
“A recession doesn’t feel too bad right now,” said Thomas Mayer, chief European economist at Deutsche Bank AG, “but we’re still a long way from a showdown.”
Finance ministers from the world’s major economies agreed on September 4 that it is not time to withdraw stimulus measures equivalent to 2 percent of global GDP this year and 1.6 percent in 2010, according to IMF estimates.
Last September, the world was already suffering from a credit freeze caused by the collapse of the US housing market. The collapse of Lehman, considered one of the banks too big to be allowed to fail, triggered a much more serious global economic crisis and temporarily paralyzed markets.
Federal Reserve Chairman Ben Bernanke later said markets were in “anaphylactic shock.”
growth
A year on, experts remain divided on the risk of a renewed recession, but the worst of the downturn appears to be over as far as global trade and industrial activity are concerned.
The MSCI World Equity Index has risen from its March lows, regaining about two-thirds of the ground it lost since Lehman Brothers filed for bankruptcy on September 15, 2008.
Yale University economist Robert Shiller wrote in the New York Times at the end of August that the return of confidence is now becoming contagious.
Truly global figures are hard to come by, but the Netherlands Bureau for Economic Policy Analysis, which collates official data from about 70 countries, said global industrial production rose 2 percent from May, the fastest month on record since 1991.
Global trade volumes rose 2.5 percent in June, the biggest increase since July 2008, according to a Dutch state-run agency.
“The recovery is still likely to be relatively slow, but even so, it’s a much better performance than in the 1930s,” said Jorgen Elmeskov, chief economist at the Organisation for Economic Cooperation and Development.
The OECD on September 3 effectively declared an end to the recession in advanced economies, saying economic growth was expected to recover in the third quarter after faster growth in China and across Asia in the second quarter and stronger cross-border trade.
Official think tanks forecast that U.S. and euro zone gross domestic product would expand again in the third quarter after four and five quarters of contraction, respectively.
