10 May 2008

As predicted, the US is in a recession, and growth is slowing in most other countries, according to a recent report, 'Shooting the Rapids: What happens if financial turmoil capsizes the global economy' by The Economist. The report confirms the organisations previous speculations as reported in Heading for the rocks: Will financial turmoil sink the world economy from August 2007.

Scenarios for the future
In addition to addressing the present situation, the report outlines three possible scenarios for the future.  The first implies a more positive position, suggesting the US responds to monetary and fiscal stimulus and is be able to rally in 2009, while other countries slow, but suffer only modestly.  In a second scenario, the US economy fails to respond to policy stimulus, and other economies also stall.  The final scenario suggests policy stimulus results in overheating, creating a sharp tightening in policy stance, which prolongs the downturn overall.

While there is no way to know which, if any, of these scenarios will pan out, there were a few key conclusions the report observed.

Key Conclusions
The US economy is vulnerable to the potential failure of conventional monetary and fiscal policy to stimulate recovery.  The present slump the US is in could become the worst in more than 50 years with potential for massive job loss.  Along with the US, the global economy is suffering, and places like Japan may become vulnerable, while places like China and India’s speedy expansion could come to a screeching halt.  

 [M Mckenna]

[Copyright Expatica 2008]