Bill Emmott at PostGlobal

Bill Emmott

Great Britain

Bill Emmott is the former editor of The Economist magazine, a leading international current affairs publication from England. He is now an independent writer, speaker, and consultant on international affairs. Close.

Bill Emmott

Great Britain

Bill Emmott is the former editor of The Economist magazine, a leading international current affairs publication from England. more »

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A Welcome Global Slowdown

The Current Discussion:The global economy is quaking. Are we heading toward a global recession? Who's to blame?

The world economy has grown faster in the past four years than at any time since the 1960s. So virtually any slowdown is likely to seem alarming by recent standards. But actually, there's no need to panic.

OK, the world's biggest single economy, the U.S. (about 25% of world output, depending on the dollar's latest rate), is in or nearly in recession. Yes, the collapse and rescue of Bear Stearns was dramatic. But I would argue that the fall of the Bear was good news, a sign that at last Wall Street is accepting the reality that its feverish speculation in fancy securities, using ridiculous amounts of leverage, has produced huge losses that now have to be admitted to. Blood needs to be let on the Street, and that is what has happened at Bear Stearns – and it may happen at one or more other investment banks too. The consequence of that must and will be tighter regulation in the future of the risks banks take and the capital they set aside against those risks.

But this does not mean the U.S. is headed for disaster, and certainly not the global economy either. House prices are still falling in the U.S., and they will surely lead to a drop in consumer spending. There will be some tightening of credit conditions for corporate borrowers. The bankers' write-offs will sap activity. But remember this: unemployment remains historically low, at 4.8%. Inflation is a worry, but at 4% it is a nice sort of worry to have. Exports are rising rapidly, thanks to the falling dollar. Capital is abundant on a global scale, thanks to Asian savings and Gulf country surpluses. So the backdrop for this--yes, large--adjustment in America is extremely favorable.

America isn't the only country with problems. China's 8.7% inflation rate may well be the ultimate reason behind last week's protests in Tibet, and it could give rise to wider protests too. High food and energy prices are producing inflation problems elsewhere. What that tells us, however, is that on a global scale demand has been running ahead of supply--there has, if anything, been too much growth, not too little. The world needs a bit of a slowdown in order to get inflation--and, in the longer term, global warming--under some sort of control.

So my expectation would be for a sharp recession in America, a slowdown in those west European countries that have shared America's housing boom (Britain, Spain, Ireland), but then only a modest slackening of growth elsewhere. The IMF earlier this year forecast global growth for 2008 of 4.1%. Perhaps that is now half a percentage point too optimistic. Even so, that is still far from being a global recession.

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