The road ahead
Chinese consumers, like these heading to a Shanghai mall, continue to spend at a healthy pace
(2 of 2)
Yet questions remain about whether there has been enough change to set the recovery on a truly sustainable course. Stephen Roach, chairman of Morgan Stanley Asia, worries the giant imbalances that contributed to the crisis — excessive debt and deficits in the U.S. matched by excessive savings elsewhere — are still a danger to the world economy. Policies aimed at supporting growth, such as Washington's Cash for Clunkers initiative, says Roach, may only perpetuate those imbalances by reinforcing America's unhealthy consumerism and the world's reliance on it. "We've stopped the bleeding, but it is not clear to me that we're moving back to significant improvement in the underlying health of the global economy," he says. "Unless the world comes up with more than one consumer, the recovery is going to be anemic."
Such uncertainty about the true nature of the recovery underlines the next big challenge: How can policymakers nurture the nascent revival while mitigating the dangers of doing so? The only way the world avoided a more severe recession, even a depression, was the unprecedented intervention of governments and central banks — the near-zero interest rates, bank rescues, fiscal-stimulus programs and, in some cases, industrial bailouts. But such government action, if maintained for too long, can lead to asset-price bubbles and other destabilizing evils. Close the spigot too quickly, though, and the recession — think the letter W — could return.
That possibility makes unwinding state stimulus measures a tricky game. The conundrum is most advanced in China. As growth returns, the easy money that has lifted the economy might encourage a dangerous escalation in property prices while undercutting banks' balance sheets. But any rumor of tightening sends Shanghai stocks into a tailspin.
Even when the era of big stimulus comes to a close, the reign of big government is unlikely to end with it. The world economy hasn't experienced such a heavy government hand since the 1970s; the recession has reopened the debate over the appropriate roles for the state and market in a modern economy. In Dalian, and again at the next G-20 meeting in Pittsburgh, Pa., there will be much talk of overhauling the world financial system to prevent a meltdown from happening again.
Yet before we worry about the next downturn, we still have to get through this one. The world economy may be over the worst, but we're still far from where we were before the crisis. The U.S. has lost 6.7 million payroll jobs since December 2007. "It'll take a long, long time to make up all the economic activity that was lost during the recession," says Jessop of Capital Economics. One year after the fall of Lehman, the best the world can collectively do is keep all fingers tightly crossed.
—with reporting by Adam Smith / London