Perilous
Times
Global economy at the tipping point
By Annalyn Censky
CNNMoney November 9, 2011: 1:39 PM ET
"The global economy has entered a dangerous and uncertain phase,"
IMF head Christine Lagarde said in Beijing Wednesday.
NEW YORK (CNNMoney) -- Europe is heading for recession. China is
battling its own economic demons. And with the United States also
facing problems at home (9% unemployment anyone?), it's hardly in
a position to help.
Without a white knight to step in and save the day, will we all go
down together?
"The global economy has entered a dangerous and uncertain phase,"
cautioned International Monetary Fund Managing Director Christine
Lagarde this morning in Beijing.
"If we do not act, and act together, we could enter a downward
spiral of uncertainty, financial instability and a collapse in
global demand," she said. "Ultimately, we could face a lost decade
of low growth and high unemployment."
Some evidence shows we could already be past that point.
Tuesday, the Conference Board warned world economic growth will
remain below its potential for many years to come. Growth is
likely to slow to just 3.2% next year, then pick up slightly for a
few years, before falling to just 2.7% per year between 2017 and
2025.
"I think Lagarde is being optimistic," said Nariman Behravesh,
chief economist for IHS Global Insights. "We're headed for a lost
decade anyway."
Even China and India, which have recently enjoyed rapid economic
growth, are worried. Following their fifth so-called financial
dialogue on Wednesday, the two countries issued a strongly worded
statement diagnosing the global economy as in a "critical phase"
and urging "strengthening of international policy."
Two weeks ago, European leaders agreed to boost the lending power
of the region's bailout fund. But that's done little to boost
confidence. Since then, Italy's borrowing costs have surged and
Greece's debt crisis has remained in the spotlight, forcing prime
ministers of both countries to agree to resign from their
positions down the road.
Meanwhile, the U.S. is still struggling to recover from its own
financial meltdown three years ago. While company earnings have
bounced back, Americans are seeing little relief amid 9%
unemployment and a still-slumped housing market.
As headlines focus on the bickering between presidential
candidates, Congress has yet to pass a meaningful jobs bill and
the Super Committee is fast approaching its deadline to agree on
$1.2 trillion in spending cuts.
Though most economists are not predicting another recession for
the United States, not enough is known about American exposure to
Europe's debt crisis.
"If we learned anything in 2008, it's that we don't know what we
don't know about the linkages," said Carl Weinberg, chief
economist for High Frequency Economics. "We think that American
banks are adequately capitalized to withstand any shock from
Europe, but we are also watching for those unexpected results."
The one bright spot in this mess seems to be China's still robust
economic growth. But even the world's second largest economy is
not insulated completely from external shocks.
Weaker demand from abroad is already hurting Chinese exports and
is expected to continue to weigh on their manufacturers.
Meanwhile, the Chinese government continues to struggle with a
delicate balance of letting the air out of its real estate market,
without stifling growth.
The silver lining here, is that new data out Wednesday show
inflation has started to cool in China. That could give
policymakers more leeway to focus their efforts on stimulating
their economy in the event of a global slowdown.
But don't expect the Chinese to rush to everyone else's rescue.
"China is not going to bail out Europe. It's not going to bail out
the U.S.," said Behravesh.
If leaders in Europe and the U.S. can't swiftly solve their own
problems, how can anyone expect agreement across the continents?
"You should not expect miracles in international coordination,"
said Bart van Ark, chief economist of The Conference Board.