The Global Economy's Gathering Storm

MUNICH – From 2004 to 2007, the world economy experienced an unusually long and strong boom, with growth rates of nearly 5% and with many countries participating. The European Union (EU15) recorded 2.4% growth on average during these years. In Germany, where growth averaged 1.8% during this period, some journalists proclaimed a new economic miracle. Now, however, increasingly bad news is giving rise to serious doubts; dark clouds are hovering over the United States, in particular. Is the world economy on the brink of recession?

In the US, real-estate prices remain in free fall, and the banking crisis is still claiming new victims (Bear Stearns, IndyMac, First Heritage Bank, First National Bank of Nevada, First Priority Bank, Fannie Mae, Freddie Mac, etc.). In the banking world as a whole, expected write-offs now considerably exceed the €400 billion mark projected just last spring.

Unemployment, moreover, is rising at its fastest rate in seven years. Overall employment, which is still high in historical terms, has been declining continuously since the beginning of 2008. It is surprising that America’s stock market hasn’t crashed yet, since all other indicators are pointing downward. The Standard ampamp; Poor’s price/earnings ratio recently stood at around 20, well above the long-term average of around 16 since 1881.

Disturbing signals for the world economy have also come from recent surveys of economic activity. The Ifo World Economic Climate index deteriorated in the third quarter of 2008 for the fourth consecutive time. That decline was primarily the result of more unfavorable appraisals of the current economic situation, but also reflected another downward revision of expectations for the next six months. Today, the index is at its lowest level since the fourth quarter of 2001.