From 2004 to last year, the world economy experienced an unusually long and strong boom, with growth rates of nearly 5 percent and with many countries participating.
The EU recorded 2.4 percent growth on average during these years. In Germany, where growth averaged 1.8 percent 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 US 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 and so on). In the banking world as a whole, expected write-offs now considerably exceed the 400 billion euro (US$588.5 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 this year. It is surprising that the US stock market hasn’t crashed yet, since all other indicators are pointing downward. The Standard & 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 this year 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.
The cooling of the Ifo World Economic Climate index was particularly marked in Western Europe and Asia. This has dispelled hopes that Asian economic activity could develop separately from that of the US, thereby offsetting European exporters’ losses in the US. In the third quarter of this year, the Ifo index for Asia was at its lowest level since the attack on the World Trade Center in 2001, with particularly poor economic assessments coming from Japan.
In the US, the climate indicator declined again after having sunk dramatically in the second quarter, bringing it to its lowest level since 1991. The University of Michigan’s Consumer Sentiment Index fell in June to its lowest level in decades and has since recovered only insignificantly. Also for the euro area, the Ifo Economic Climate index registered a dramatic decline.
Europe’s largest economy, Germany, is now going into the doldrums. The Ifo Business Climate index, which, though based on a survey for Germany, is regarded as Europe’s most important economic activity indicator, has been falling with few interruptions since the fall of last year. It is now clearly in territory that implies an economic downturn.
In addition, export expectations for German manufacturing are heading south. Incoming orders in manufacturing, the most important indicator in the official statistics, fell more sharply in the first two quarters of this year than at any time since the beginning of 1993. In the second quarter, the German economy shrank at an annualized, seasonally and calendar adjusted rate of 2 percent. All in all, there is now hardly any doubt that the economic upturn in Germany that began in the summer of 2005 is now coming to an end.
Amid this gloomy outlook, we anxiously look for encouraging signs. The price of crude oil, which hit a record level of US$148 a barrel last month, has since fallen almost 25 percent, or US$36. Whether recent developments in the US economy give reason for hope is now the question. With an annualized 1.9 percent quarterly rise in GDP in April-June, growth was twice as high as in the first quarter (0.9 percent). This largely reflects the impact of US$152 billion in tax rebates (roughly 1 percent of GDP), but given the continuing and intensifying real-estate crisis, this boost to growth still does not mark a turnaround.
In Japan, with an economy of about half the size of the US, growth forces remain weak. In the second quarter of this year, the Japanese economy shrank at an annualized rate of 2.4 percent, primarily because of weak exports.
With all this discouraging news, it is little comfort that some areas of the world are still displaying considerable growth rates. China is expected to grow by 9.5 percent this year and next, with India growing by 8 percent, Russia up by 6.5 percent, owing to higher oil prices, and Latin America growing by 4.5 percent on average during this period. Unfortunately, the weight of these countries and regions is small; China, the biggest of them, accounts for only 5 percent of the world economy.
So the signs of a global economic slowdown have increased. The crisis in the US is now spreading to other areas of the world.
Former US Federal Reserve chairman Alan Greenspan may be right when he says: “This crisis is different — a once or twice a century event deeply rooted in fears of insolvency of major financial institutions.”
Hans-Werner Sinn is a professor of economics and finance at the University of Munich and president of the Ifo Institute.
COPYRIGHT: PROJECT SYNDICATE
The gutting of Voice of America (VOA) and Radio Free Asia (RFA) by US President Donald Trump’s administration poses a serious threat to the global voice of freedom, particularly for those living under authoritarian regimes such as China. The US — hailed as the model of liberal democracy — has the moral responsibility to uphold the values it champions. In undermining these institutions, the US risks diminishing its “soft power,” a pivotal pillar of its global influence. VOA Tibetan and RFA Tibetan played an enormous role in promoting the strong image of the US in and outside Tibet. On VOA Tibetan,
Sung Chien-liang (宋建樑), the leader of the Chinese Nationalist Party’s (KMT) efforts to recall Democratic Progressive Party (DPP) Legislator Lee Kun-cheng (李坤城), caused a national outrage and drew diplomatic condemnation on Tuesday after he arrived at the New Taipei City District Prosecutors’ Office dressed in a Nazi uniform. Sung performed a Nazi salute and carried a copy of Adolf Hitler’s Mein Kampf as he arrived to be questioned over allegations of signature forgery in the recall petition. The KMT’s response to the incident has shown a striking lack of contrition and decency. Rather than apologizing and distancing itself from Sung’s actions,
US President Trump weighed into the state of America’s semiconductor manufacturing when he declared, “They [Taiwan] stole it from us. They took it from us, and I don’t blame them. I give them credit.” At a prior White House event President Trump hosted TSMC chairman C.C. Wei (魏哲家), head of the world’s largest and most advanced chip manufacturer, to announce a commitment to invest US$100 billion in America. The president then shifted his previously critical rhetoric on Taiwan and put off tariffs on its chips. Now we learn that the Trump Administration is conducting a “trade investigation” on semiconductors which
By now, most of Taiwan has heard Taipei Mayor Chiang Wan-an’s (蔣萬安) threats to initiate a vote of no confidence against the Cabinet. His rationale is that the Democratic Progressive Party (DPP)-led government’s investigation into alleged signature forgery in the Chinese Nationalist Party’s (KMT) recall campaign constitutes “political persecution.” I sincerely hope he goes through with it. The opposition currently holds a majority in the Legislative Yuan, so the initiation of a no-confidence motion and its passage should be entirely within reach. If Chiang truly believes that the government is overreaching, abusing its power and targeting political opponents — then