Media headlines tend to highlight the warts while ignoring the excellent overall health of the global economy. The World Economic Outlook of the IMF estimates that global GDP growth (in PPP terms) will average 5.1% between 2004 and 2008. Per capita income growth will average 4.1%, the highest in history. Even better, growth has been fastest in poorer countries. Between 2004 and 2008, developing countries are estimated to average 7.8% annual growth against only 2.7% for high‐income countries. So, world prosperity is rising faster, and is better distributed, than ever before. In the past, an American recession would have hammered the world economy. But today developing countries have taken over the job of global locomotive. In 2006, China accounted for 30% of incremental global GDP growth in PPP terms, with the US and India accounting for 12% and 11% respectively. So, a mild American recession will discipline the US without causing a global meltdown. Sounds like good news to me.
The world economy is actually in excellent health, notwithstanding occasional warts. The price of oil is near US$100 a barrel because the strongest economic growth I have seen in my lifetime is lifting all commodity prices. The high price constitutes a welcome market warning to consumers to slow consumption, and to producers to increase exploration. Credit markets are okay in most of Asia and Africa. They have been roiled in the U.S. and Europe by the sub‐prime mortgage problem. An excellent market invention (securitization of loans) made it possible for poor people to get home loans earlier denied to them. The defaults arising from excessive adventurousness on the part of banks constitute a modest social price for increasing financial access to the poor. The penalty for excesses has been paid by those most culpable, who have the deepest pockets. The U.S. may indeed be slipping into a mild recession, but that is an overdue warning from markets that living beyond your means is not feasible forever, and that Americans need to curb their consumption.