World Economy: Ugly Things Can Happen

The world economy is slowing down. Growth has declined most notably in the US, after almost a decade of strong and uninterrupted expansion. In Europe too, some weakness can be discerned, especially in Germany. The Japanese economy is performing much as it has been for the past decade – poised delicately between stagnation and decline. So, are we heading for recession or financial crisis and how prepared are we?

The World Today
6 minute READ

Willem H. Buiter

Adjunct Senior Fellow, Council on Foreign Relations

The slowdown in the US is the response to the earlier unsustainable boom. Towards the end of the nineties, private demand was allowed to get out of hand. Consumption and investment were fuelled by a speculative bubble in the stock market, rationalised with projections of corporate earnings growth which implied that eventually all of Gross Domestic Product (GDP) would be absorbed by profits. Projected long term productivity growth was revised upwards by one, one point five, or even two percent per annum – based on five years or less of dodgy data. Pundits wrote the obituaries of the business cycle and of inflation, dead at the hands of the new economy.

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