The Big Question: Is the global economy heading for a recession?

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Why are we asking this now?

Haven't you heard of the credit crunch? Partly for this reason, and partly because some of the world's major economies were slowing down anyway, the International Monetary Fund is to cut its 2008 world economic growth forecast to 4.8 per cent, from a previous forecast of 5.2 per cent. That may not sound much, but it equates to about £100bn of lost output, which the economy will never be able to recover.

The forecast for the United States will drop to 1.9 per cent from 2.8 per cent, while the forecast for the eurozone will go to 2.1 per cent from 2.5 per cent. The forecast for Germany and France will be cut to 2 per cent from 2.4 per cent and 2.3 per cent respectively. Nearer home, on Tuesday the Chancellor lowered his growth forecast for the UK next year from a central projection of 2.75 per cent to 2.25 per cent. Most economists agree with that injection of pessimism, with some seeing British growth dipping below 2 per cent.

What exactly is meant by 'recession'?

An understandable question, given that the UK has enjoyed 12 years of continuous growth. Memories of the last economic storm, the recession of the early 1990s – with its unemployment, bankruptcies, punitive 15 per cent interest rates and negative equity misery for homeowners – seem to have dimmed.

The generally used definition is that a recession is two consecutive quarters of "negative growth", meaning that the economy shrinks in size. Jobs, wage growth, living standards and house values all usually shrink with it.

Any other definitions?

The American National Bureau of Economic Research is the arbiter of the business cycle and says a recession occurs when "a significant decline in economic activity spreads across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough."

On that sort of definition the UK is arguably due to go into recession next year. According to HM Treasury, the UK grew at 3.25 per cent in the first half of 2007; if next year it decelerates to 2.25 per cent, then that will be a fall of a full percentage point. That is going to feel a lot more disruptive than, say, moving from stagnation to negative growth of 0.25 per cent.

In terms of the US economy – accounting for about a quarter of the total economic activity on the planet – the most recent peak occurred in March 2001, ending a record-long expansion that began in 1991. The most recent trough occurred in November 2001, inaugurating an expansion that's lasted until now.

Recession? Depression? What's the difference?

Best answered with an old economists' joke: When your neighbour loses his job, it is called a slowdown. When you lose your job, it's a recession. But when an economist loses his job, it becomes a depression.

Who says there's to be a recession?

Depends on the definition, but all agree that things are going to get tougher. Alan Greenspan, former chairman of the US Federal Reserve Board and the man who more or less ran the world's economy for two decades before his retirement a couple of years ago, has been telling anyone who'll listen that the chances of a recession are somewhere between a third and 50/50.

In his more recent pronouncements he's tended towards the 50/50 end of that spectrum of probabilities. He's pointed out that the US economy has been expanding since 2001 and that there are signs the current economic cycle is coming to an end: "When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign. For example in the US, profit margins... have begun to stabilise, which is an early sign we are in the later stages of a cycle."

What do other authorities say?

The IMF's gloominess follows that of the OECD, which last month downgraded its growth projections for most of the world's major economies. Jean-Philippe Cotis, the Organisation's chief economist, argued for bold interest rates cuts by the world's central banks to restore order to the credit markets. In any case he cut the OECD's 2007 US GDP forecast to 1.9 per cent from the 2.1 per cent figure it struck in May. As for the euro area, the OECD has inched its 2007 GDP forecast down a bit to 2.6 per cent, with Japan on 2.4 per cent, quite a bit down on its recent success. The UK, at 3.1 per cent, was actually bumped up a bit, but it's the outlook for the next year and 2009 that's more worrying.

How can a recession happen?

A combination of factors feed on themselves to push the world into a downward spiral: the US sub-prime crisis, the housing slump, the credit crunch, the difficulty of finding finance, the depressed state of consumer confidence. Some say we're simply due a recession because the expansion in the world economy has been going on for so long.

Who will save us from slumping?

Governments in the West could, if they hadn't already been borrowing like crazy. Central banks could – and do – cut interest rates to revive markets, though there may be limits to that. Otherwise we'll have to look to some unorthodox sources for help. There are the BRICs. This means Brazil, Russia, India, China and other emerging market economies who, so far, have sailed serenely past the wreckage in the rest of the world economy. Provided China in particular can survive its reliance on exporting to America, we might be OK. While we'll be struggling to see 2 or 3 per cent growth they'll probably still be on double-digit expansion for the foreseeable future, putting them on track to overtake the US as the world's largest economy in the next few decades.

There is a case for placing China in the No 2 spot already, though with her much larger population the country enjoys a rather lower standard of living than the Americans. But one day, perhaps in the second half of this century, China may catch up with the US on this measure as well. Then China, rather than the US, will be the engine of the world economy. The only thing that can stop her is her demands for raw materials and energy – some say it would take another couple of planet Earths to provide what's needed for the Chinese and other emerging nations to enjoy Western living standards. In the long run the environment may well prove to be the ultimate barrier to economic growth.

Is the world heading for recession?


* The credit crunch and problems with the US housing market will certainly pull the world economy down

* You can't buck the trade cycle – sooner or later the economy will stop growing anyway

* The recent boom has been built on a mountain of debt. It will have to be repaid some time


* The world economy is fundamentally sound and the wider stock market is booming

* Central banks like the US Federal Reserve can cut rates to avoid a recession, as they have in the past

* Damage caused by the easing credit crunch should be confined to the financial sector