We have all become so focused on the catastrophe of the Spanish banks – for understandable reasons – that we are in danger of missing something even bigger: that the evidence of a global slowdown has been piling up. This is happening irrespective of the eurozone's plight, though, of course, the slow-down in Europe contributes to it.
So the key questions are to what extent the world economy is self-correcting and to what extent policies will, or indeed can, be shifted to encourage more growth.
The evidence first. Two things stood out. One was that the oil price has been falling for the longest period for 13 years on the back of a growing awareness that demand is falling in the two biggest markets, the US and China. We will see what Opec does about this at its Vienna meeting on Thursday; it may agree to some production cuts. But, meanwhile, the fact that the oil price has fallen some 15 per cent this year is hugely helpful to inflation everywhere.
The other thing was the surprise cut in interest rates in China, the first since late 2008. The ways in which monetary policy influences the Chinese economy are different from in the West because central direction of investment has a larger role than it does in market economies. But the cuts matter, partly because the price of credit has a marginal impact on the amount people will borrow but more because it gives a signal that monetary policy is being eased and will be eased further. The reason for this?
It seems clear that the Chinese authorities are now seriously concerned about the economic slowdown and are stepping on the accelerator again.
Alongside these two bits of evidence there was the usual noise from the regular statistics, including weak purchasing manager indices from Europe and some similarly weak data from the US on consumer credit. The comments from Ben Bernanke, the chairman of the Federal Reserve, about events in Europe slowing US exports further depressed the markets. In fact, among the few positive surprises last week was the UK service industry purchasing managers' index, which suggested that this chunk of the British economy – half in fact – still seems to be growing at a reasonable pace.
Viewed globally, there is a slowdown. So, the first thing we need to know is to what extent there might be offsetting factors. And the answer – and this applies to all the developed world – is that inflationary pressures are easing. The US is particularly sensitive to petrol prices and a fall in oil price feeds through more quickly to consumer demand than it does in Europe.
But here, falling fuel prices were one of the main factors trimming producer prices, which may start to fall in the next few months. UK inflation has been consistently higher than in Europe since 2008, in contrast to the previous 10 years, as you can see from the main chart. But we are clearly well past the peak and, if those Goldman Sachs projections prove correct, the UK and eurozone should be close to 2 per cent by the end of this year.
Viewed from our own position, a fall in inflation is hugely welcome for two reasons. It is a direct and immediate boost to real incomes; so it is plausible that by the end of this year the worst of the squeeze on real incomes will be over. But a fall in inflation also creates more headroom for a looser monetary policy, more quantitative easing, if things get really bad in the eurozone. We cannot insulate ourselves from disruption in the European banking system but, to some extent, we can offset its effects.
That leads to global economic policy in the event of a more serious slowdown. China, as noted, is already moving. Mr Bernanke was cautious last week about the extent to which the US might help Europe – understandably so. Politically, there is no credit in the US for helping Europe bandage what are perceived to be self-inflicted wounds. In any case, it is not really the job of the Fed to do that. Referring to the eurozone crisis, he told Congress last week: "Certainly, it is at a point where it is important for European leaders to take additional steps to contain the problem." So there.
My own reading of all this is that, were this slowdown to become more serious, the world's main economic powers would shift to a more expansionist mode. The G20 summit in Mexico later this month will give this focus, but my instinct is that this is too early to expect any concerted action. Put bluntly, things are not bad enough.
Look at the right-hand graph, which shows the changes in European and UK business sentiment from the end of the boom – composite purchasing manager indices. Anything above 50 suggests business expects expansion, anything below contraction. There is certainly a sharp divergence between the UK and Europe, for whereas, during 2010, European businesses were somewhat more optimistic than their counterparts here, now they are a lot more pessimistic. But European business is nowhere near as gloomy as it was in 2008 and 2009. It is signalling that it expects a slight contraction, not a catastrophe. UK business is signalling that it expects some growth.
So what should we look for in the weeks ahead?
First, the oil price is crucial. If it continues to slide, that will be both a response to fears of a deeper global slowdown but also an offsetting factor to that slowdown. My own expectation is for the price to stabilise around present levels; that, in itself, is good enough to reduce pressure on inflation here and elsewhere.
Second, we should pay attention to China. It is hard from a distance to appreciate the extent of its slowdown, so we just have to listen to the noise and try to pick out clear signals.
Third, we should always remember that the US remains the world's largest economy. After China, American consumers are the biggest determinant of global demand.
And Europe? We have to assume that some sort of patch will be applied to the Spanish banking system, which is essential. But we have also to assume that it will be only a patch, nothing more.
People reveal what they want in their actions, not their words
How much is enough? It is a question that has kept recurring through history, long before economists tried to measure happiness or "utility", as utopians tried to envisage a perfect society in which everyone had enough to fulfil their needs and to live in harmony.
If you don't believe that, try this: "It is indeed a strange thought that the end should be amusement, and that the business and suffering throughout one's life should be for the sake of amusing oneself."
That was Aristotle. The quote is at the head of a chapter called "The Mirage of Happiness" in a new book called How Much is Enough?, by Robert and Edward Skidelsky, that comes out later this month. The question is so compelling and so timely – witness the collective anger towards so-called greedy bankers – that it is good an economist (Robert, Lord Skidelsky, is best-known for his Keynes biography) and a philosopher (Edward teaches at Exeter University) should have another shot at it.
The book starts with a criticism of Keynes, and in particular his feeling that as incomes rose people would feel their daily wants were supplied and would work for only 15 hours a week to meet them adequately. It argues that there is no single measure of happiness but instead lists other things needed to lead "the good life". These include the basics, of course, but also health, security, respect, harmony with nature, friendship and so on. And they suggest policies that might push society towards these objectives.
It is a charming book and one deserving attention. But there is a bit of economic theory that should be noted. It is called "revealed preference", the idea being that you ignore what people say they want but look at what their actions reveal they want. And, in the US and China, it would seem people mostly want more consumer goods. We know what Aristotle would say about that.