Battered by successive shocks, the world economy may be slipping into multicontinent recession.
First, the housing bubble burst in the US and some European nations. Then soaring commodity prices hit countries around the world, especially poor food-importers. Now the bank turmoil wrought by the real estate downturn is spreading beyond Wall Street to other financial capitals.
"At this point it is a very fragile situation," says Eswar Prasad, an international economics professor at Cornell University and a fellow at the Brookings Institution in Washington. "There is a crisis of confidence more than anything else."
The US economy remains the world's biggest, and its course is a powerful influence on business from London to Kuala Lumpur. While US stock indices continue to gyrate in the face of financial uncertainty, a growing number of economists believe America's economy as a whole is either already in a recession or on the brink of one.
Sixty-nine percent of economists say the US will fall into recession this year, according to a just-released survey from the National Association for Business Economists. That's up from 56 percent in a similar poll taken in May.
"The general view is ... that this recession will be longer than the last two – lasting roughly one year, but relatively mild," the survey concluded.
If financial markets don't stabilize, however, the situation might get worse. The Treasury Department is working as fast as it can to implement a new $700 billion financial rescue bill, but that does not seem to have impressed investors around the world.
US markets followed suit at their opening, with the Dow Jones Industrial Average plummeting hundreds of points.
"If financial conditions fail to improve quickly, near-term economic prospects could deteriorate markedly," warned Chris Varvares, president-elect of the National Association of Business Economists and president of Macroeconomic Advisers, in the NABE forecast.
Meanwhile, Europe and Japan appear unlikely to be able to avoid their own recessions.
European governments' approach to financial problems has so far been on a case-by-case basis. That is similar to the way the US government attacked the problem in its opening stages.
But as the credit crisis worsened, the United States moved on to a more systemic rescue plan, via the Treasury's new $700 billion asset-purchase ability. European economies are more intertwined than are their political structures, and so far the eurozone has not been able to follow suit.
The Sentix gauge of investor sentiment in the 15-nation eurozone fell in October to its lowest reading since its inception in 2002. Investors in the zone "expect a recession," concluded the survey.
In Britain, economic growth slowed to a virtual standstill in the second quarter. Indices for new manufacturing orders, employment, and output sank to their lowest marks since the early 1990s.
As to how sharp this downturn might be, a quick recovery appears unlikely, according to the International Monetary Fund.
The financial crisis will act as a dampening agent, making any coming recessions perhaps two to three times worse than they might otherwise have been, according to the IMF's newly released World Economic Output.
"It is now all too clear that we are seeing a dangerous shock to mature financial markets, posing a major threat to global growth.... Even though past periods of financial stress have not necessarily been followed by recessions, we find that when the banking system suffers major damage, as in the current episode, the likelihood of a severe and protracted downturn in activity increases," said Charles Collyns, deputy director of the IMF Research Department, at an Oct. 2 press conference.
Emerging market economies such as India and China have so far been insulated from the credit crunch, due to the fact that their financial institutions had much less money invested in bad US mortgage-based assets.
Their economies may be somewhat insulated from a spreading downturn as well, though declining demand from major markets such as the US will have an effect.
The overall emerging-market growth rate will slump to 5.7 percent in 2009, down from 7.4 percent in 2007 and a projected 6.3 percent for 2008, according to a forecast from Michael Mussa, senior fellow at the Peterson Institute for International Economics.
The next step in attempting to control the spreading downturn might be for European leaders to take a more coordinated approach to their problems.
European politicians and bankers have "been thinking that this was just limited to the US," he says.
Fear of a lasting economic event so dire that it will endanger people's savings is spreading, according to Mr. Lannoo, and the challenge is to keep this fear from expanding.
"We cannot start to let customers start to think that their money is at risk.... Europe needs to have a whole plan that is a quantum step forward [from what has already been proposed] to change the minds of customers," he says.