Slump that gave us all the shivers

The World Economy

FOR THE world economy, it was a year of astounding contrast and much confusion.

For a start, more than one-quarter of the world plunged into recession while the rest cantered blithely on. So much for there being a single global economy.

It was the year when many countries experienced deflation, yet the falling prices of goods in the shops were in stark contrast to the soaring price of shares on the financial markets.

Despite a serious wobble in August, most markets ended the year higher than they had begun. And it was a year when strings of companies across the developed world merged and announced job losses, yet in those same countries unemployment fell and total employment continued to rise.

So it was not a bad year, unless you lived in East Asia. For those parts of the world economy that went down, the scale of the catastrophe was far beyond anything in post-war memory. The slump in East Asia was, for most people in the region, their first experience of recession. Although the first signs of slump were evident in mid-1997, hardly anyone glimpsed how bad the downturn might become.

A year ago Japanese officials were still proclaiming that the economy would grow this year, albeit slowly - the official Organisation for Economic Co-operation and Development forecast was for 1.5 per cent growth. The outcome looks like minus 2.6 per cent, with no end of recession in sight.

Or take Hong Kong. Flush with the self-confidence of the handover to China, Hong Kong thought it could avoid recession altogether. Now it has had its first recession since the war with the economy shrinking by nearly 5 per cent.

For some other countries of the region the tale has been truly dreadful. The saddest case must be Indonesia, where the economy has shrunk by over 15 per cent, and domestic consumption has fallen by nearly one-third.Russia, another economic disaster zone, has seen its output fall "only" 7 per cent this year.

The other extreme was the United States. Could the boom continue into its eighth year? The answer was a resounding yes. The US economy has grown by 3.5 per cent. Unemployment has fallen, inflation has stayed low and crime has fallen too. It is the so-called "Goldilocks economy" - not too hot and not too cold, but just right.

Here in Britain we have had a modest success. There was no recession. The economy has grown by 2.7 per cent (against a forecast 2.2 per cent). Inflation has been lower than forecast, more jobs have been created and the current account has been more or less in balance.

It has been a good year for most of continental Europe too. Both Germany and France have had a year of low inflation and enough growth to start cutting into double-digit unemployment rates. Ireland, Sweden and Spain have done better still.

One common feature round the globe was deflation. Prices in Japan have been falling for years but in the past year the phenomenon spread. Even in Britain, where the Bank of England was repeatedly jacking up interest rates in an effort to cap inflation, some prices have been falling, including phone calls and clothes.

Indeed, producer prices are lower in most countries than they were a year ago. Companies that used to jack up prices whenever costs rose have found they can no longer do this - and thus a wave of fear has been sweeping though the business world. One way in which that fear has manifested itself is in mergers. It is not the only reason for the mega-mergers, but a principal one. The areas affected - including oil, cars and banking - were those where competitive pressure has been strongest. Suddenly, giant companies such as Chrysler and Mobil felt they needed to merge to ease the pain of downsizing.

That pain is being felt by their staff. Here in Britain the City has been hard hit by job losses in the fall-out from bank mergers, but the phenomenon is nationwide and worldwide. Fortunately, in most countries growth was strong enough to absorb the people laid off.

Financial markets found this confusing. On the one hand slower inflation encouraged a fall in long-term interest rates. But growing evidence of a squeeze on company profits, with bad news on Russian debts, led to jitters in August that saw share prices in most markets fall by as much as 20 per cent.

The volatile markets caused some casualties, most notably the near-collapse of the US fund managers Long-Term Capital Management (LTCM). The annual meetings of the International Monetary Fund and World Bank in October took place in an atmosphere of crisis. World prosperity seemed fragile. Then - quite suddenly - the jitters seemed to be over. LTCM was rescued and share prices recovered.

The year has ended with concerns ringing as loud as expressions of confidence. The main worry of 12 months ago continues: could the rest of the world catch the East Asian disease? But now there are new ones. Will the euro be a success? Is the millennium bug a threat? Will Britain hit recession? Myguess is that 1999 may turn out better than many people fear. I am more worried about 2000.