Global warnings as economy enters ‘danger zone’
The heads of the World Bank, the IMF and the US Federal Reserve have all issued grim financial forecasts. Governments are running out of options and the markets are full of fear.
The big economic question: is it time to panic? After a week of dire forecasts and grim economic news, many around the world seem to think the answer is yes. In stock exchanges around the world yesterday, shares plunged into the red. Desperate traders struggled to retrieve their money as gloomy economic forecasts sent the value of investments into a dizzying financial tailspin.
Why so much fear, and why now? The immediate cause is a newly announced US financial plan, called 'Twist', which has sent a ripple of dismay through the world's markets.
It's not that the plan is bad – on the contrary, most analysts agree that the new measures (essentially juggling government debts to keep interest rates low) are sensible and appropriate. The problem is that no one thinks they will be enough. The world is suddenly waking up to the fact that there simply isn't much more that can be done.
The custodians of the global economy have run out of options – and they are pessimistic about the future. The latest IMF report on economic prospects said the world was facing a toxic combination of 'weak growth, weak balance sheets and weak politics.'
Growth is weak because confidence is low, productivity flat and unemployment high. Lenders are hanging onto their money and investment has frozen up.
Balance sheets are weak because unsustainable loans taken out by individuals and governments now look impossible to pay back. Greece is set to go spectacularly bankrupt, and it could drag scores of banks and countries down with it.
Politics is weak because the USA, by far the world's largest and most important economy, is paralysed by bitter fighting between political parties. Quarrelsome congressmen and women look ready to sacrifice the world's economic wellbeing for narrow political gain.
International experts are agreed: things look bad. The economy is 'in a danger zone', said the head of the World Bank, warning that a 'double-dip' recession might be on the way. Even in the best-case scenarios, the recovery will be bumpy, fragile and slow – we may see a 'lost decade' of dismal growth.
There are now a growing number of extreme pessimists, who think we are at a tipping point on the way to full blown financial catastrophe. The closest precedent for today's conditions, they argue, is the Great Depression of the 1930's, which destroyed the savings and livelihoods of millions, causing famine, hyperinflation and war.
Yes things are bad, optimists reply, but even this cloud has a silver lining. The destruction of the old economic rules and realities will clear the way for a new kind of economy, which will usher in a new age of fairness, innovation, creativity and growth. From the ashes of the old, will come a better future.
- Is the economy headed for disaster?
- Which do you think is most dangerous: weak balance sheets, weak growth or weak politics?
- In an economy of the future, which things would you change?
- Do some further research on the Wall Street Crash and the Great Depression, and create a simple timeline showing how the financial chain reaction spread.
Some People Say...
“A financial crash would be good for the world in the end.”
What do you think?
Q & A
- What is this 'Great Depression'?
- It started with a stock market crash in 1928. Banks and investors lost millions as the value of stocks plunged. People saw their savings disappear in seconds, leaving them suddenly penniless.
- That sounds terrible!
- It was. The financial shockwaves spread around the world, causing mass unemployment and terrible poverty. Hyperinflation in Germany meant that money lost almost all its value. People did their household shopping with wheelbarrows full of cash.
- And it led to war?
- The misery of the Depression was a major factor in the rise to power of Adolf Hitler.
- Stock exchanges
- Specialised markets through which investors trade in shares of companies. The overall value of shares sold in exchanges is measured by share indexes (also known as 'indices'). Yesterday, the indexes were looking decidedly unhealthy.
- A tailspin
- When aeroplanes spin out of control and start spiralling towards the ground at high speed, that is called a 'tailspin'. The metaphorical use of the term is self-explanatory.
- The International Monetary Fund. The IMF is a lender of last resort for countries that run out of cash. It is an internationally funded body tasked with keeping the global economy as stable as possible.
- Balance sheets
- Summaries of money owed and money owned. Many countries have unaffordable amounts of debt on their balance sheets.
- Efficiency of production. Productivity is a crucial measure of economic good health.
- Unable to meet financial obligations.
- A double-dip recession sees economies shrink, then pause, then shrink again, just when everyone was hoping for a recovery.