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Two big anniversaries will be celebrated next summer: the centenary of the outbreak of the first world war and seven years since the start of the most serious global financial crisis since the Wall Street Crash of 1929. Neither, despite initial optimism, was over by Christmas.
Indeed, recovery from the events triggered by the losses made on sub-prime mortgages in the United States has been as faltering and costly as the war of attrition on the western front: the occasional advance set against a prolonged period of stasis.
The coming year is supposed to be the one in which the global economy finally sorts out its problems: the US picks up speed; China avoids a hard landing; Japan emerges once and for all from deflation; Europe exits its debt crisis; and new regimes for supervising banks ensure no return to the irresponsible, highly leveraged lending of the pre-crash era.
But the events of the past few years have taught policymakers not to count their chickens. There are still five good reasons for them to remain vigilant:
The nature of the crisis
History shows that the most serious recessions are those that involve the financial sector, include a large number of countries and affect the core of the global system. The crisis that began in 2007 scores on all three counts.
Unfinished business
In the aftermath of the Wall Street Crash and the Great Depression, strict curbs were put on the activities of the banks and these remained in force for many decades. Supervision has been tightened up since the near-collapse of the financial system in late 2008 but the power of the big international banks has not really been challenged and the shadow banking system remains largely unregulated.
Unconventional policy
Central banks and finance ministries tore up their instruction manuals when the crisis erupted. They slashed interest rates to just above zero, they turned on the money presses, they used taxpayers' money to recapitalise the banks and they allowed budget deficits to balloon in order to support demand. Economic policy entered uncharted waters and has remained there. Fiscal policy – decisions affecting tax and spending – has been tightened, but none of the major central banks is planning to raise interest rates or to sell back the bonds they have amassed through quantitative easing. Central banks have no real idea what will happen when they try to return monetary policy to normal.
Global disharmony
For a brief period when the global crisis looked most dangerous, there was genuine co-operation in the G20 gathering of developed and emerging-market economies. There was a sense that global problems – a shortage of demand, high unemployment levels, regulation of transnational finance – required global solutions. This mood, however, only lasted from the collapse of Lehman Brothers in September 2008 until the London summit of April 2009. Once emergency action had averted a second Great Depression, countries went their own way, leaving the G20 an ineffectual body.
Falling real incomes
The squeeze on real wages is one way in which the "new normal" differs from the pre-crash world. While there had been signs in the quarter-century leading up to 2007 that weaker trade union power and outsourcing had made life tougher for workers, the tendency was for wages to rise more quickly than prices. The post-crash period has seen a period of falling inflation-adjusted incomes unprecedented in modern history – a lost decade of eroding living standards that has resulted in a dearth of global demand at a time of global overproduction.
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