The world economy teeters on the edge

Financial Fallout: With global markets tanking, economists are already making comparisons to the 2008 recession. Many see a global slowdown ahead, but few are yet forecasting a full-on recession.

With global markets tanking, economists are already making comparisons to the 2008 recession. Many see a global slowdown ahead, but few are yet forecasting a full-on recession. (Jeffrey E Biteng / ThShow more

With prospects for the global economy getting bleaker by the day, analysts and economists are already drawing comparisons to the 2008 financial crisis and the worst downturn since the Great Depression.

S&P 500 Index: The S&P 500 Index, a measure of the largest US stocks, has fallen by 16.67 per cent since July 22, marking the largest drop in markets since the 2008 recession. Fears are rising of a repeat of that turmoil, when the S&P fell by more than half between May 2008 and March the following year.

September 15, 2008: Lehman Brothers declares bankruptcy, putting one of the largest and oldest US investment banks out of business. Markets dive on growing concern about the stability of the country's banking and financial system.

July 25, 2011: Foster + Partners developed the master plan for the groundbreaking centre for environmental studies and sustainability. From the start the designers were thinking outside the box, hoping to design a model for future cities. The plan also uses concepts and styles rooted in ancient Arab culture.

August 5, 2011: Barack Obama, the US president, calls for compromise to reach a deal on the country's bitter debt-ceiling debate. Markets go into a tailspin that culminates in the worst selloff since the global downturn.

There are some disturbing similarities, they say, including major falls in stock markets, lower oil prices, higher gold prices and rising volatility. Few observers, however, are yet ready to declare this summer's swoon a sure prelude to global recession.

While bad economic data from the US and Europe's sovereign debt crisis were alarming, Dr Giyas Gokkent, the chief economist at National Bank of Abu Dhabi, said the meltdown did not yet match the crisis of confidence created by the failure in September 2008 of Lehman Brothers, the storied US investment bank.

"This time around, we're not at that juncture," he said. "I don't think there's a confidence crisis of that nature at this time. There is, I think, nervousness and a lack of confidence among investors and there are prospects for slower global economic activity."

Declines in markets, Dr Gokkent said, would compound matters with the "wealth effect", making investors even more jittery after falling prices erased trillions of dollars of savings. Yet it would take some "major policy mistakes" in Europe to turn this summer's market rout into a full-blown double-dip recession.

"Obviously the uncertainty is not helping matters, and that will mean lower consumption as households will be less likely to spend because people are concerned for their jobs," he said.

"On the investment expenditure side, companies will be reluctant to spend if they're not sure the demand is there. So there's going to be a dampening in global economic activity."

John Higgins, the senior markets economist at Capital Economics in London, agreed it was still too early to say recession was inevitable. But it certainly is possible, he said, and had become more likely with the downgrading of the US's sterling "AAA" credit rating by Standard & Poor's on Friday and further economic ills in Europe.

To some degree, he said, markets were pricing in the fact countries would have fewer tools at their disposal this time around to combat a recession if one did take hold.

Central banks in Europe and the US have already reduced interest rates to near zero to stimulate lending, and after spending billions on rescues of banks and racking up large amounts of debt, governments have little money left for another round of stimuli.

"Investors are becoming much less tolerant of government debt in Europe and the US, and policymakers are therefore in much less of a position to respond to a downturn with new economic stimulus and monetary stimulus because interest rates are already at zero or close to it," Mr Higgins said.

Whatever the future holds, markets have weighed in with a punishing assessment. As investors seek havens in gold and US treasuries, stock prices have plummeted globally, with the US Dow Jones Industrial Average off 15.75 per cent since July 21. Germany's Dax index is down 24.5 per cent since July 26, and Tokyo's Nikkei has fallen by 11.35 per cent in the past two weeks.