World Economy: Stuck in Low Gear?

In March while driving on the south coast of Italy, I encountered some of the most demanding road conditions I have ever seen.  I have previously driven in the Swiss Alps and on other tricky mountain roads, but none compare to the danger and thrill of driving on the Amalfi Coast, particularly when you throw in the impatient local drivers.  One driver passed me on a single lane road and within five minutes he caused a head-on collision. But with the luck of the Italians, his damage was moderate and no one plunged off the steep cliff. 

My little Mercedes rental car had seven gears, so I was able to drive in a low gear. This prevented my car from running away when traveling around blind corners and while going up and down the steep inclines with inadequate guard rails. (Please see my photos in my previous post.)

But low gear is not always fun. It became quite obvious in traveling through southern Europe, that the economy there is also stuck in low gear.  The volume of tourists is considerably reduced from a few years ago.  Shopkeepers are struggling to get enough business.  Everyone complained of jobs lost due to Chinese imported goods.

Regrettably, the situation in Europe economically is not much different from the rest of the world.  We are all stuck in a low gear.  And trying to drive our economy faster is frustrating governments everywhere.

Because of the large swings in world stock markets, the underlying economy seems hard to track. During good months for the stock market, people get their hopes up for a full recovery. When markets plunge, as they did in May, fears revive about a second recession.

The best indicator to watch worldwide is the growth of jobs in the private sector. In the USA, jobs appear to have improved recently, but that is due mainly to temporary government workers hired for doing the next census. When these temporary workers are released in a few months, the situation will reverse.

Unfortunately, not nearly enough jobs are being created for a recovery. Some economists call this a jobless recovery. But without job creation, the term “recovery” is meaningless.

The situation is marginally better in the developing world of China, India, and Brazil.  But not good enough to revive the whole world economy. Those who think a recovery in China can restart the global economy are dreaming. The transfer of too many manufacturing jobs to China is one of the global imbalances that must be rectified.

So what is the outlook?  Another big financial collapse? A recovery next year? I suspect that next year we will still be stuck in low gear. There is a danger of going back into reverse like what happened two years ago, but I don’t expect that.

Another possibility is more stimulus to try to get the economy moving faster, which President Obama wants. But he is nearly alone in believing that deficit spending would help. I support the majority of world leaders who believe that deficits must be cut to avoid a bigger collapse in a few years.

So why can’t someone fix the economy?  Why can’t we create lots of new jobs?  The answers to these questions are complex.

The time period most of us remember best is the last 50 years, when the economy grew at unusual speed up until 2008. That was due to broad improvements in technology, relative global peace, and constantly growing world trade. Those conditions will not be repeated soon.

The best thing is for individuals, families, companies and governments to realize that we will likely be stuck in low gear for the foreseeable future, likely for another 5 – 10 years. We are far better off than people were in previous centuries, but we shouldn’t expect more from the economy—rather we need learn how to make do with less.

Individuals will still be able to find careers. Some companies will grow and succeed. However, for most people and for their governments, this will be a very challenging time.