The US retains the capacity to disrupt the world economy which it has possessed since at least the 1920s. Accordingly, the struggle between the deleveraging of high-income countries and the growth momentum of emerging economies is ending, alas, in a decisive victory for the former.

Yet the news is not all bad: inflationary pressures are abating fast. Even so, this hides more bad news. The broken financial system will weaken the transmission from monetary easing to the economy. This will make the coming slowdown last a long time. Even though decisive action has saved the financial system from its recent heart attack, the patient remains enfeebled.

In 2007, the world economy (measured at market exchange rates) grew by 3.7 per cent in real terms. This year, according to the latest World Economic Outlook from the International Monetary Fund, growth is forecast to be 2.7 per cent. Next year it is expected to be a mere 1.9 per cent. The economies of high-income countries are forecast to stagnate next year. Meanwhile, emerging economies are forecast to grow at 6.1 per cent. This seems fast. But it is 0.6 percentage points slower than was forecast in July and is well below the 8 per cent achieved in 2007 and 6.9 per cent still forecast for 2008.

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Martin Wolf

October 22, 2008 1:18am in Uncategorized | Comment