The world economy is at grave risk of entering a depression, in which developed-world growth rates average less than 1% per annum between 2009 and 2013, according to a new report by the Economist Intelligence Unit. The depression scenario carries a 30% probability, while there is a 60% chance that the stimulus operations now underway will restore stability by 2010/11, albeit at lower growth levels than we’ve been accustomed to. A third scenario, in which failing confidence in the US economy leads to mass withdrawal from dollar-denominated assets and a collapse in the US currency, carries a 10% probability.
Depression would be characterised by mass bankruptcies and job losses. In a vicious cycle of debt deflation, the burden of debt would rise in real terms as collateral declined in value and incomes fell. As bad debts piled up, banks' balance-sheets would be weakened, resulting in forced asset sales. These would drive down prices further. Like banks and financial institutions, households and companies would “deleverage”, disposing of assets at fire-sale prices to pay down debt.
Under this scenario, the major developed economies would grow by less than 1% on average over the next five years. Even when growth resumes, it would do so at levels too low to create jobs for a new generation of unemployed.
For non-OECD countries, growth would average between 1% and 4% from 2009-13. Export-oriented emerging markets would suffer from a prolonged downturn in global trade. Even China would struggle to sustain growth rates above 5% per annum in the period.
“Far from ‘decoupling’, emerging markets are already revealing how intimately they are linked to economic conditions in the developed world,”says Alasdair Ross, the report’s editor.“The credit crunch has destroyed many concepts considered sacred just a few months ago, and the supposed immunity of emerging markets to global economic currents is one of them.”
Manning the barricades: Who’s at risk as deepening economic distress foments social unrest
The following types of vulnerability in emerging markets are being exposed, and would come more strongly into play in a depression:
- Countries where growth was driven by credit expansion and asset price appreciation;
- Countries geared to global growth;
- Countries with a commodity dependence.
Few emerging markets do not fall into one or more of these categories. Those most acutely affected are in category 1, including many Central and East European countries, which were running large current-account deficits and face large external debt repayments. Category 2 encompasses much of Asia, given its dependence upon export-led growth. Category 3 takes in Latin America, the Middle East, Africa and Russia.
Economic distress and social breakdown
The free report—Manning the barricades: Who’s at risk as deepening economic distress foments social unrest—also examines the threat to political regimes of rising public discontent as living standards fall, unemployment rises and government competence is questioned. Using a specially-constructed Political Instability Index, the Economist Intelligence Unit assesses the vulnerability of 165 countries to such unrest, and finds that, even if the world escapes depression, 95 are either at high or very high risk.
Four sets of factors are feeding the risk of social unrest:
- The depth of the economic crisis: The most serious downturn since the 1930s, global and synchronised as never before, will drive up poverty and unemployment.
- A very personalised crisis: This downturn is not seen as the product of impersonal social forces, but of the ineptitude and greed of identifiable individuals. This is fuelling a deep anger, raising the risk of a popular explosion.
- Underlying anxiety: There is a suspicion that things are even worse than officials are saying. The anxiety is fed by the seeming powerlessness of authorities to stem the crisis.
- The contagion factor: Just as the economic crisis has proved to be global in ways not seen before, so local incidents have a potential to spark unrest not only in neighbouring areas, but even further afield, especially in view of the almost instantaneous nature of modern communications.
“Warnings of the dire social consequences arising from the economic downturn have come with increasing frequency, but have often been dismissed as self-serving, political or scare-mongering,” says Ross.“But we believe that the threat is grave, and that the risk of complacency far outweighs any risk of exaggerating the dangers.”