Turning Point for the Global Recession?

In the September 3, 2009 TIME article "Turning Point for the Global Recession?," Michael Schuman explains that the world may be on its way to economic recovery, but it will never be the same:

Economic crises never happen overnight. They are the result of years, even decades, of global economic change, policy errors and investor misjudgment. But there always seems to be that one moment — the Wall Street crash of 1929, the fall of the Thai baht in 1997 — when long-simmering trends coalesce to cause a dramatic loss of confidence. For what has turned out to be the worst recession in 70 years, that moment came on Sept. 15, 2008, when Lehman Brothers filed for bankruptcy and bankers around the world asked that most lethal of questions for world financial stability: If a bank as well known as Lehman can fail, who is safe? And off we went, spiraling with head-swimming speed into recession.

As terrified bankers refused to lend, global economic activity hit a wall. Ships lay idle as trade fell to a trickle. Protests erupted in Reykjavík as Iceland tumbled into bankruptcy. Even mighty China shuddered with fears of mass unrest as millions of workers were tossed from jobs at shuttered export factories. And as policy became alphabetized, with predictions that the recession would resemble a U, V or W, some worried the global economy would mimic the letter L — an interminably protracted period of meager or no growth much like the one that has plagued Japan for nearly 20 years. (See pictures of the global financial crisis.)

That hasn't happened, and one year after the Lehman bankruptcy, as policymakers and pundits gather to take stock — the summer meeting of the World Economic Forum opens in Dalian, China, on Sept. 10 — it appears less and less likely that it will. Yes, economic conditions remain miserable. The International Monetary Fund predicts the world economy will contract 1.4% this year, the worst performance since the end of World War II. But everywhere economists can point to what they call "green shoots" sprouting in the gloom. Japan, Germany and France emerged from recession in the past quarter, and economists are busily upping forecasts for U.S. growth. After a brief pause, China has returned to its caffeinated growth path, lifting much of Asia with it. "The worst-case scenario of a complete economic and financial meltdown has clearly been avoided," says Julian Jessop, chief international economist at consulting firm Capital Economics in London. Jim O'Neill, chief economist at Goldman Sachs, proclaims: "We're out of recession globally."

Yet even if a recovery is on track, this recession will not be like most others, when what went down simply came back up. The downturn is having a fundamental impact on the globe's economic future. The world after the Great Recession won't be the world that existed before.

Perhaps most importantly, the recession has altered the role of the U.S. in the world economy. For decades, the U.S. consumer has been the primary driver of global growth. The inherent dangers of such dependence on one source had long been obvious, and now that the financial crisis has finally reined in debt-gorged Americans, the world has launched a quest to find replacements. To turn its citizens from savers to spenders, China doled out subsidies to buy cars and appliances and revved up efforts to construct a stronger social safety net. In Taiwan, where the export-oriented economy was among the worst hit, the government is promoting new domestically focused industries like tourism. "We were hard-hit by the shrinkage of the export market in the U.S.," Taiwan President Ma Ying-jeou told TIME. "So one lesson we learned is we should diversify our export markets."

The effort is showing signs of success. Asia is leading the way out of recession, with the help of the pocketbooks of its own consumers. The region's three largest countries — China, India and Indonesia — have remained buoyant through the downturn due in great part to domestic demand. The spending power of Asia's newly rich has stimulated the beginnings of a recovery throughout the continent. Continuing that trend has become a matter of official policy; India, for example, inked free-trade agreements with South Korea and the Association of Southeast Asian Nations in August. It is not fanciful to think that Asia is on its way to becoming a self-propelling trade bloc, decoupled from the U.S.

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. (See pictures of the Top 10 scared traders.)

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.