Holding out for a hero

With a stream of data from the industrial countries pointing to an increasing likelihood of recession, and a global economic slowdown now in the cards, the world is looking for leadership. Sadly, we'll have to keep holding out for the hero who will steer us clear of depression. No such leader is emerging from the current crop.

Europe confronts the real possibility of a major financial crisis that could rival that of 2008. Governments with heavy debt loads, like Greece and Italy, are desperately trying to convince bondholders they can come good on their loans. Investors, anxious and doubtful, are driving their interest costs higher. The governments in question need cash and a vote of confidence from their stabler, northern partners, and in particular Germany.

Instead, they are getting half-measures, vague promises, and evasion. Germany's leaders, under pressure from domestic voters who sneer at the errant ways of their southern neighbours, are turning away from Europe, apparently keen to cut their losses.

In America, the economy appears to be inexorably sliding back into recession. At a time when the country needs a new bout of fiscal stimulus to stave off the worst, right-wing Republicans have held the nation hostage in order to impose economic austerity upon a government they distrust. Yet President Obama offers little reassurance. He seems to be basing his economic strategy on the need to secure re-election next year. His plan may be to let Republicans hang themselves with their own rope. But the country will pay a high price in the meantime.

The '30s and now

Parallels to the Great Depression of the 1930s are not difficult to find. Then, governments sought to safeguard their currencies by cutting budgets, leading to self-reinforcing drops in demand. Today, governments are avoiding the real issues of long-term debt growth that will hamper future development, but cutting short-term spending.

Then, governments retreated from global engagement and tried to tend their own gardens in what became a beggar-thy-neighbour downward spiral. In the 1930s, they did it by imposing trade restrictions to try to protect domestic producers. Today, it is cutting budgets in the hopes that they can outcompete other countries for investment - the same countries to which they hope to export their way out of recession.

But then, who will do all the importing that will keep the world economy afloat? Increasingly, all eyes are on China as the saviour. But while the Chinese economy remains relatively healthy, it is not yet large enough to pick up the slack of the US behemoth. Moreover, during the 2008 crisis, the Chinese applied a massive stimulus programme that boosted global demand. This time around, they are worried about inflation, which is rising, and which hurts Chinese workers. With public discontent at the cost of living leading to greater instability, China will not likely be risking an inflation shock just to save its partners.

Gloom but not doom

Nonetheless, since China, and many other emerging markets, will continue to grow, the prospect of an actual global depression is not yet great. The more realistic scenario is of a long period of slow growth, with periods of recession in developed countries. This was always going to be the medium-term outcome of the 2008 crisis.

Countries which had lived beyond their means for decades were not going to resume growing strongly in months. It will take years of deleveraging before health is restored to the West. And given the preference for short-term Band-Aids to real structural reform, the advent of this deleveraging may get postponed further yet.

With demand for energy dropping, and with interest rates low, developing countries face new opportunities. But what we gain with one hand, we lose with the other. Demand declines in our major industrial partners will force us to further increase productivity, if we are to hope to continue sailing through this storm. There will be no easy ride out of this one.

John Rapley is the Bradlow fellow at the South African Institute of International Affairs. Email feedback to columns@gleanerjm.com and rapley.john@gmail.com.