The world can collectively breathe a huge sigh of relief – the global recession is over.
Of course, it may not look that way. Especially if you're one of the 15 million Americans still out of work – or if your house is still worth substantially less than your mortgage. But many "emerging" or developing nations are bouncing back rapidly. China, in fact, is again concerned about growing too quickly. And even the more mature economies, such as those of the United States and Europe, are rebounding, albeit more slowly.
Economists say this two-speed recovery will gather strength in 2010, but warn it will be a long, protracted process to recover prerecession conditions.
Is the global recession really over?
And Dominique Strauss-Kahn, the managing director of the International Monetary Fund (IMF), told reporters in Hong Kong recently: "2010 is going to be a crucial year – the first year after the crisis when countries can lift their eyes to the longer-term horizon." He added that this will be "a year of transformation for the world."
Following the financial crisis that swept the world beginning in 2008, the broad consensus of economists and policymakers is that the global economy is again expanding.
China, for example, says its gross domestic product (GDP) jumped 10.7 percent in the last quarter of 2009, compared with the previous year. India's GDP hit 7.9 percent in the third quarter.
Europe and the US are recovering more slowly. The US economy grew 5.7 percent in the fourth quarter, the second consecutive quarter of growth after a full year of decline, though its GDP still contracted 2.4 percent over 2009. Britain's economy, meanwhile, rose just 0.1 percent in the fourth quarter of 2009.
But that doesn't mean the global economy is completely out of the woods. "We are in the recovery phase," explains Simon Johnson, an economist at the Massachusetts Institute of Technology in Cambridge, via e-mail. Countries are stabilizing at different speeds and the global economy is still fragile.
Which countries are recovering fastest?
The global recovery has been primarily driven by emerging markets, as "their financial systems were less damaged by the crisis and they were not overly indebted [prior to the crisis]," says Professor Johnson.
In fact, many emerging markets – China, India, Australia (which saw only one quarter of contraction) – did not actually enter a recession, though their economies did slow.
China, India, Australia, and a number of Asian countries are already expanding. The IMF predicts China's economy will grow by 10 percent in 2010. On the other hand, Japan and Europe will likely see growth of only 1 to 1.5 percent.
The US economy, predicts the IMF, is expected to expand at a 2.7 percent rate. The IMF anticipates a global growth rate of 4 percent for 2010.
Which countries have been slower to recover?
Contrary to previous recessions, developed nations – including the US, Britain, and countries in continental Europe – are recovering relatively slowly compared with their still-developing counterparts.
The lag is primarily due to "underlining structural weaknesses, high debt, and low savings," says Stroppiana. In the US and Britain, in particular, high unemployment combined with high household debt and continuing home-mortgage foreclosures means that consumers simply aren't in a position to drive recovery.
"Unemployment typically continues to rise even after a recession has ceased," says Stroppiana. "Part of the reason is while firms still have very weak revenue and sales outlook, they continue to trim costs, part of which is staffing levels."
Even on this front, there are telltale signs of recovery. German tour operator TUI AG said recently that bookings have risen enough to bring its 1,800 employees back to work full time. In May 2009, it cut staff hours.
Still, high debt levels are impeding recovery in Greece and Eastern Europe. As the world's largest economy, the US will play an important part in the global recovery, but its slow rebound means its role will not be as big as in previous recessions. This represents a broader shift, says Stroppiana. The transfer in global demand to emerging markets has been "an ongoing process."
What might derail a global recovery?
The most immediate threat to the global economy will come from withdrawal of stimulus measures put in place to stem the crisis. As governments begin to address their debt levels and raise interest rates from their current emergency settings, some countries will be at risk for another downward lurch.
In the longer term, the global community will have to address the issues that caused the financial crisis. "We're going to have a recovery," says Johnson. "But we haven't fixed the underlying problem."
That problem includes "distorted incentives in our financial system," Johnson explains, whereby the US and other Western governments guarantee reckless risks made by large banks. If the risk works out, the banks enjoy the financial gains; if it doesn't, taxpayers foot the bill.
"This problem has actually been worsened by the crisis and bailout," Johnson says.
The rise in commodity prices since 2009 is also something to watch, says Stroppiana. Increases in commodity prices were driven primarily by imports and demand from emerging markets, in particular, China.
But if prices were to continue to rise, which Stroppiana does not currently expect, this would erode household buying power and affect inflation rates, which in turn could threaten the economic recovery.