Drop in GDP reflects significant problems in the world economy

But that doesn’t mean that sharp drop is unimportant.

The sharp plunge reflects significant problems for the world economy. In recent years, the world economy overall has seen its fastest growth in modern times. The expansion of commerce has meant expanding productivity rates and jobs, allowing most nations to grow faster than they could without such ties.

Now, the globe could see its first overall decline in the volume of trade in many years.

On Friday, Caterpillar announced it plans to cut another 2100 jobs, on top of some 20,000 layoffs announced earlier in the week.

“[Caterpillar] must drastically reduce our production levels and cost structure to remain competitive for the long run,” Bob Williams, a company vice president, said in a statement. Cat has 113,000 employees worldwide.

New worries about protectionism

Some economists worry that the recession could cause nations to focus more on self-interest -- with the risk that measures designed to protect domestic jobs could backfire by deepening the global downturn.

So far, this remains more a risk than a reality. The danger is that modest actions could end up provoking larger ones.

"The latest versions of the US fiscal stimulus package contain provisions regarding 'domestic content,'" Richard Bernstein, chief investment strategist at Merrill Lynch, said in a note to clients Thursday. "The protectionist trend is gaining strength much faster than we thought even just a few weeks ago."

The delicate US-China relationship -- with China relying on huge exports and America being the largest importer -- faces new tension. As a presidential candidate, Barack Obama pledged to take a tougher line on trade issues with China. Beijing reacted angrily last week when US Treasury Secretary Timothy Geithner told senators at his confirmation hearing that China was manipulating its currency.

Vice President Joe Biden said on Thursday the Obama administration had made no determination on whether China was manipulating its currency and would not make a unilateral attempt to block its exports.

In a phone call Friday, Chinese President Hu Jintao told President Obama that he wanted to strengthen cooperation between the two countries to fight the global economic slowdown, China’s Xinhua news agency reported.

Of course, one man’s “protectionism” can be another’s bid to correct abuses of current trade law. But economists generally say that a recession is a risky time for trade relations to fray. In the Great Depression, rising trade barriers deepened the downturn.

Wire service material was used in this report.

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