Global stagnation

Global stagnation is generally considered in late 2011 to be a possible short-term prospect, involving a large part of the world economy. Of 30 countries surveyed by the International Monetary Fund, the growth rates of the economies of 20 were classified as "below trend and moderating"; of 8 as "below trend and rising"; and of 2 as "above trend".

The global slowdown of economic growth that occurred in 2011, following the strong growth of 2010, is thought to be attributable to a range of factors, including:
   (a) the completion of the stockbuilding phase of the inventory cycle that normally follows a recession;
   (b) the economic shock caused by the Japanese tsunami of March 2011;
   (c) the loss of output due to the continuing deleveraging by banks and the consequent restriction of credit to companies;
   (d) the effect on demand of continuing deleveraging by companies and households;
   (e) the effect on demand of the reductions in public expenditure and the other fiscal adjustments in the fiscal aftermath of the Great Recession;
   (f) the reduction in the availability of credit resulting from precautinary action by European banks in anticipation of the restructuring of the Greek government's debt;
   (g) losses of investor and consumer confidence due to fear of a global financial crisis resulting from a sovereign default by a major developed country.
Assessments of the relative importance of (a) to (g) differ, but it is evident that factors (a) and (b) were transient effects with no implications for current prospects. Factors (c) and (d), on the other hand, may be expected to exert a continuing but diminishing influence. The effects of factors (e), (f), and (g) are expected to persist into 2012 and possibly beyond.

In the absence of further downside developments, the major forecasters expect world growth to continue, although at a more subdued rate, through the next two years - but at a rate in the developing countries, at which output gaps and unemployment are bound to persist. The downside developments that could halt or reverse that growth include:
    (a) a failure by the eurozone authorities to take effective action to avert the danger of a sovereign default or withdrawal from the eurozone by a large member country;
    (b) failure by the United States authorities to obtain congressional agreement to a viable programme of deficit reduction; and,
    (c) positive feedback from, and to, (a) or (b) arising from resulting damage to investor and consumer confidence.
The avoidance of outcome (a) requires, at minimmum, the implementation of the the decisions of October/November 2011 in addition to those of 21st July 2011. The operational details of neither have yet been established and the bond market has reacted with scepticism about their prospects of success. As regards outcome (b), there were already doubts about the ability of the Congress to agree on the necessary fiscal measures, and when in November the Congressional Joint Select Committee on Deficit Reduction failed to reach agreement, the bond market failed to react. The global investor and consumer pessimism in the autumn and winter of 2011 was widely attributed to what was perceived as policy failures on both sides on both sides of the Atlantic, however.