A race to the recession line

Bill Jamieson reviews global economic trends and finds the credit crunch infection is still spreading

Wider and deeper, and lower for longer: more than one year into the global credit crunch and we seem no nearer to an ending. Indeed, the shock waves spreading out from a sharp downturn in bank lending have still to hit home in the real world economy of manufacturing, services and employment. And it is this ‘real world’ news flow, particularly across Europe, that is set to grow worse this winter.

The effects of the credit crunch have reached far further than first thought, confounding those who had rested their hopes on a ‘de-coupling’ of Asian economies from the US. And estimates of recovery are now being pushed further over the horizon. A few months ago, the consensus was that 2008 would be tough, but that the second half of 2009 would see a recovery setting in. Now there is a growing belief that 2009 will be no better and that 2010 will also experience sub-trend growth across America and Europe. Here in the UK, the IMF has slashed its 2009 forecast for GDP growth from 1.7 per cent to 1.1 per cent. Some private estimates suggest 2010 will be no better – and with growth down to zero last quarter, according to the ONS, even gloomier forecasts can be expected shortly.

What seemed at first a ‘short, sharp shock’ in the US residential mortgage market, capable of being absorbed within a few months, has grown into the worst crisis to hit global financial markets for a generation. It has been compounded by a searing rise in the price of oil which has pushed up inflation and blocked central banks from cutting interest rates further to help ease the intensity of the downturn. Indeed, the European Central Bank raised rates this summer to 4 per cent.

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