Global recession – local impact

Warnings of a world-wide recession are emerging loud and clear from some of the major figures in the global economy. In the September issue of its twice-yearly global financial stability report, the International Monetary Fund highlighted a sharp slowdown in the US economy, triggered by a slump in house prices, as the major risk. Other dangers included:

• A surge in inflation that would force central banks, particularly the US Federal Reserve, to impose sharp interest rate rises that would ripple through emerging markets
• New increases in oil prices as geopolitical tensions worsen - a reference to a US threats against Iran over nuclear technology
• A sudden unravelling of the record imbalances between surpluses in Asia and deficits in the US
• A mutation in the avian flu virus that would lead to a "sharp decline in economic activity".

Jaime Caruana, director of the IMF's monetary and capital markets department, said: "Markets appear to price in little provision for these risks. So if one or some combination of these risks materialises, financial markets could experience greater turbulence that places stress on international markets, possibly with a wider impact on the global economy."

The IMF, in its half-yearly report on the global economy published today, says fears about the cooling of the housing market in the United States are spreading to other countries such as Ireland, Spain and Britain where house prices seemed overvalued "by most conventional measures".

With analysts talking of risk, volatility and turbulence in the months to come, the political dangers inherent in the growth of credit in recent years are well understood. Those whose role is to pull the strings of the global capitalist economy are painfully aware of their inability to prevent the emerging catastrophic impact on millions of ordinary people.

At its August 23rd meeting, the directors of the IMF pointed to the possible constraints on the use of traditional policy measures. They noted: "A situation in which household bankruptcies become commonplace may be quite different from a situation of large-scale corporate distress, as political pressures may make conventional crisis management tools difficult to use. For this reason, directors suggested that countries in which the interest and exchange rate exposure of households is large should maintain adequate reserves and set in place contingency plans to confront large interest and/or exchange rate movements."

That is the situation emerging in Britain. Official statistics released earlier this week showed record levels of personal and household debt alongside rising inflation. For the fourth month running, the inflation rate exceeded the Bank of England forecast and is the highest since New Labour came to power nine years ago, increasing pressure for an interest rate rise. Unemployment in the UK is also rising, adding to difficulties in meeting debt. The total rose to 1.7 million in the three months to July, which is the highest figure recorded since January 2000. The figure was 93,000 higher than last month and up 280,000 on the year.

The global crisis is already having a local impact.

Gerry Gold, economics editor