Stephen King: We must look beyond 9/11 for the causes of global downturn

Even without last year's horrific events, the world economy would be struggling to recover

Just under a year ago – in the light of the 11 September atrocities – the world economy appeared to be staring over the edge of a recessionary precipice. Yet, the worst fears of economists were not realised. Activity rebounded towards the end of last year. Business surveys began to improve rapidly. And it looked as though the monetary stimulus seen both pre- and post-11 September was beginning to have a substantial impact.

A year on, and optimism about the outlook for the global economy is fading fast. It's difficult to believe that this weakness could be the result of a delayed legacy from last year's terrorist outrages. Instead, I would argue that the majority of the world's macroeconomic problems still lie with the aftermath of the bubble of the late 1990s. In other words, even without last year's horrific events, the world economy would be struggling to recover, faced with collapsing savings and rising debt levels.

Nevertheless, some countries seem to be faring a lot better than others. In the G5 growth league for the first half of this year – using year-on-year comparisons – the US came top with a gain of 1.8 per cent. In second place was the UK, with a gain of 1.2 per cent. France came next with a gain of 0.7 per cent. In the relegation zone came Germany (down 0.1 per cent) and Japan (down a truly awful 2.2 per cent). The one country that seemed most economically vulnerable post-11 September actually did the best. The country that seemed most removed – Japan – did the worst.

Scratching beneath the surface of these differences, it is still possible to find some common themes. The most obvious is that the global downturn has been very much a corporate downturn. At best – in the case of France – capital spending was flat in the first half of the year relative to the first half of 2001. For all the others, capital spending fell significantly. And, within capital spending, the main area of weakness was technology, precisely the area that had been so strong in the late 1990s.

There are also some obvious differences. For the US and the UK, relative success this year has had a lot to do with a robust performance from both consumer spending and government spending. The same cannot be said for the others. Either they had decent government spending but failed in the consumption stakes (France) or they failed on both counts (Germany).

Why is it that some did better than others? A lot seems to hinge on the degree of policy "activism" and the sensitivity of economies to changes in policy. For the US, both the Federal Reserve and the government stepped in aggressively last year. As we all know, interest rates fell dramatically but, in addition, fiscal policy was loosened too. According to the OECD, the change in the cyclically-adjusted primary balance – a useful rule of thumb for estimating the impact of fiscal policy on economic growth – amounted to 1.1 per cent of GDP. What's more, estimates for this year suggest a further fiscal injection of about 1.7 per cent of GDP.

For the UK, monetary policy has clearly not shifted so aggressively. Then again, the housing market may be so hyper-sensitive to changes in base rates that, perhaps, not many reductions were needed to keep the consumer ticking along nicely. On the fiscal front, however, the UK has done much the same as the US. Gordon Brown and George Bush may not be the most likely of bedfellows but they have both been fiscally active. Using the same OECD comparisons, the UK may not have done quite so much as the Americans but, nevertheless, has still boosted GDP growth by more than 1 per cent both in 2001 and 2002.

The same cannot be said for the others. Either interest rates have been unable to fall – as in the case of Japan – or the declines appear to have had little impact on either consumer or capital spending (France and, notably, Germany where consumer spending is not that sensitive to changes in monetary policy). Meanwhile, on the fiscal front, Germany's fiscal stimulus in 2001 ultimately didn't amount to much – consumers tended to save rather than spend their tax cuts – and, in any case, was completely reversed through the course of this year. Over the whole two-year period, fiscal policy has also had little impact on either France or Japan.

On the basis of these comparisons, there appears to be a strong case for policy activism. In the light of the collapse in stock markets over the last 18 months and the move into recession in a number of countries last year, the economies that have done better are precisely those that adjusted the fiscal and monetary mix to the greatest degree.

A big "but" is required at this stage. First, even those that did loosen policy a long way are still struggling to sustain growth at a desirable rate. The US and the UK may be doing a lot better than Germany and Japan but their growth rates are still fairly stagnant.

Second, and more importantly for the health and stability of the world economy, the countries that should have been doing the aggressive easing over the course of the last 18 months should, ideally, have been Japan and Germany. After all, if American demand growth is no longer what is was in the past, some other country should be picking up the growth reins. At the beginning of the 1990s, America's recession was both a short-lived and modest affair precisely because there was plenty of demand still coming from Japan (still growing strongly despite the initial declines in equity prices) and Germany (because of reunification). The same arguments simply do not apply today.

The lack of collective responsibility for policy co-ordination may be no one's fault. The Japanese could reasonably argue that there is little more that they can do from a policy perspective to boost domestic demand. The Germans are constrained by the very straitjacket that they insisted should be imposed to guard against fiscal reprobates. The French may simply be happy to be out-performing the Germans, a result they have now consistently achieved over a number of years. And, as far as the Americans are concerned, if no one else is going to help them out, they might as well try their hardest to re-invigorate their own economy.

Yet this lack of collective responsibility is likely to create further problems. The Federal Reserve has managed to persuade US consumers to keep spending by offering debt at a very low initial cost – a process that has been reinforced by the very attractive credit terms offered by US car companies. This has created an unusual set of conditions. For only the first time in the post-war period, American households have continued to accumulate debt at a very rapid pace despite seeing the value of their total assets – adding together housing, equities and other savings – falling fast. Over the medium term, this kind of strategy doesn't make a lot of sense. The absence of demand elsewhere in the world has persuaded the US to follow a "jam today" policy. Yet the jam hasn't got a lot of flavour and could easily turn into a serious pickle tomorrow.

Stephen King is managing director of economics at HSBC.