Is there going to be a second recession?

In 2008, fear gripped the financial world in the wake of the US sub-prime mortgage crisis. Since then, governments have spent up large to revive their faltering economies.

That revival has largely gone well, with many beginning the year thinking the worst was over. However, since April, fear has returned to financial markets and to governments.

The fear is that a drastic cut in government spending across Europe may return the continent to a longer-lasting recession, and bring much of the rich world down with it.

But there is another force at play that may save the day: the strong economic growth of poorer countries.

The fate of the global economy over the next year will depend on which of these two competing forces is more powerful. And right now, it seems too close to call.

Force number one – the growth of poor countries

While the rich world is nursing its excessive-spending hangover, poorer countries from Asia, South America and even Africa are going through an economic boom.

Most of this economic growth has been fuelled by demand from consumers in rich countries for goods made in poor countries.

But now millions of people in poorer countries have become wealthy enough to buy many of these goods and services themselves.

It is this powerful new consumer demand that is the first force at work. Are there enough wealthy middle-class consumers in poor countries to keep global demand intact?

Force number two – falling demand in rich countries

Huge government debts and rising borrowing rates have prompted European governments to announce huge spending cuts, mainly to reassure lenders that they will all get their money back.

But this is troubling for the world economy. With Britain, Ireland, Greece, Spain, Portugal, Italy and Germany all carrying out major spending cuts at the same time, the shock to the economic recovery could be severe.

Britain is cutting spending in various departments by 25% to 40%. Ireland’s cuts are so large that their entire economy may shrink by 10%. Greece is expected to be in negative growth for several years following their economic mismanagement.

The impact this will have on European consumers cannot be underestimated. People will earn less and spend less, resulting in businesses laying off more staff.

This will shrink governments’ tax revenues and increase their welfare payments to the unemployed.

There is strong reasoning to suggest that the European continent is on the brink of a serious recession due to falling demand – this is the second force at work.

If so, any such recession will affect Europe’s largest trading partner America, whose own stimulus measures, like an $8,000 tax-credit for first-time homebuyers, are about to come to an end.

They are currently facing 10% unemployment, while increasing home foreclosures have seen a significant drop in new houses being built.

The European Union is the largest economy in the world, just ahead of the United States. A notable drop in consumer demand from both these economies will be felt by exporters all over the world.

Other rich countries like Canada, Japan, Australia and New Zealand would likely see falls in their own domestic demand.

The consequences

The main problem with another fall in consumer demand is that there would be little that governments could do to rescue the situation. They have already spent as much as they can on stimulating the economy – hence the cutbacks.

The central banks can’t lower interest rates much more than they have and printing more money would do little to help.

Indeed, a so-called double-dip recession or ‘W-shaped’ recovery is by no means far from reality.

Governments are hoping that growing local demand from the BRICs (Brazil, Russia, India and China) and other ‘emerging’ poor countries will be enough to keep the wheels of the world economy moving.

The answer to this critical question will show its face in the form of unemployment rates, GDP growth rates and stock market indexes, most likely within a year as stimulus spending ends and government cuts take effect.

At this stage, predictions on there being a second global recession are split.

Unfortunately there isn’t a whole lot the world’s population can do about it except wait and see which of the two competing forces will come out stronger.

Here’s hoping for everyone’s sake that the wealth already created in emerging countries is enough to spend us through the next decade.

By The Casual Truth