By Hans-Werner Sinn (China Daily)
Updated: 2008-03-12 15:08

With the United States bordering on recession, the global economic boom has ended. The boom was unusually long and persistent, with four years of roughly five percent growth - a period of sustained economic dynamism not seen since 1970.

The clearest sign that the boom is ending is the International Monetary Fund's forecast of 1.5 percent growth for the US in 2008. That may not sound like a recession, but the IMF's marginally positive projection primarily reflects the growth overhang from 2007, with hardly any new contribution in 2008. It is compatible with three consecutive quarters of zero growth in 2008.

Many argue that a US recession will no longer affect the world because China has supplanted America as an engine of the global economy.

Wrong. Although China is growing fast, its economic power remains tiny. While the US contributes 28 percent to world GDP, China accounts for only five percent. The whole of Asia, from Turkey to China, contributes 24 percent, less than the US alone.

At some stage, the world may no longer catch a cold when the US sneezes, but that is far from being true now. Twenty-one percent of China's exports and 23 percent of the European Union's exports to non-member countries go to the US. Thus, the world cannot help but be pulled down by a US slump.

The most recent CESifo World Economic Survey (WES) from 90 countries confirms this. Assessments of the current economic situation and expectations for the next six months have worsened everywhere.

In both Western and Eastern Europe, the index sank more than in Asia or Latin America. The decline in the WES indicator during the last two quarters was the sharpest since 2001, when the stock market bubble burst.

In the US, the WES indicator is now below the level of September 11, 2001 and so is the Michigan index of consumer confidence.

For many years, the US has lived beyond its means: a household saving rate close to zero and investment financed solely with foreign funds.

The US current account deficit, which is identical to net capital imports, grew steadily to an annual $811 billion in 2006, or six percent of GDP - by far the largest since the Great Depression.

Year after year, the US managed to sell its assets abroad and enjoy the high life at home. No longer. The world has caught on.

Banks everywhere are learning the hard way that the debt with which the US financed its consumption boom will not necessarily be repaid. The mortgage-backed securities that US banks succeeded in selling to the world are not comparable to European assets with similar names.

   1 2   

   1 2