Earlier this year, the world seemed doomed to reprise the Great Depression. With economic engines in Europe and Asia finally beginning to fire, however, economists are increasingly confident that a global recovery has begun. Now, the question is: Will it last?
France, Germany and Japan all expanded in the second quarter, surprisingly so in the case of the two European economies. That cheered investors, as did tentative signs that the U.S. is poised to join the parade in the current quarter.
But if the celebration so far has been a bit muted, it's because much of the nascent growth came from two sources of limited duration: government stimulus spending that will peter out late next year, and businesses rebuilding inventories.
The reassuring hints of a global rebound also are threatened by a bigger issue. The global economy is starting to resemble a football team made up of nothing but quarterbacks: Everyone wants to throw the ball, but no one wants to catch it. In economic terms, that means just about every major economy — the U.S., China, Germany and Japan — appears intent on exporting its way to renewed prosperity.
"We can't all export our way out of this problem. Somebody's got to import, and nobody wants to play that role," says Michael Pettis, a professor at Peking University's Guanghua School of Management.
World leaders get an opportunity to take stock of the economic scene this month when President Obama hosts a Group of 20 countries summit in Pittsburgh. Finding a way to sustain the global recovery once fiscal adrenaline and inventory restocking play themselves out will be among the G-20's top priorities.
Avoiding a dreaded double-dip recession — such as that of the early 1980s — will require advanced countries to navigate a tricky transition, says Olivier Blanchard, chief economist of the International Monetary Fund. Globally, public stimulus will add 1 percentage point to world growth this year before tapering off to less than half a percentage point in 2010, according to UBS.
In the U.S., the Federal Reserve must turn off its extraordinary efforts to pump money into the financial system, and the federal government must trim its unprecedented budget deficits in time to prevent inflation from igniting. Once governments around the world withdraw their extraordinary support, they will leave a vacuum that private-sector demand must fill.
If it does, the recovery will chug along uninterrupted. But if private demand fails to surge, forward momentum will stall. "The recovery has surprised me a little bit with its strength. ... (But) I still don't see where the sustainable aspects of the recovery are coming from," says George Magnus, senior economic adviser to UBS in London.
The savior of private demand could come from three sources: consumption, investment and net exports. Consumers, however, are sidelined by the need to repay debt. Investment, too, is unlikely to contribute much to growth, because many industries already are saddled with unused capacity. (Think anyone will build a new auto plant any time soon?)
That leaves one option, the IMF's Blanchard explained in a recent analysis: "Sustained recovery is likely to require an increase in U.S. net exports and a corresponding decrease in the rest of the world, coming mainly from Asia." Economists call that kind of fundamental shift rebalancing. And they say it's long overdue.