Where is the global economy going … and what does it mean to you?

What on earth is going on? Just what is the outlook for the world economy? Are there better times ahead … or will things get worse? Are we entering a new recovery phase … or are we in for a protracted period of little or no growth? Or are we on the edge of an abyss? What should companies plan for?

Opinions are all over the place. The signals are mixed, and making sense of them isn’t easy (and this is such an important issue, that everyone and his dog has an opinion on it!)

UNDERESTIMATING THE CHALLENGE

When the global economy hit the skids in 2008, few people saw real trouble ahead. Fewer still saw lasting trouble. Most “experts” forecast a quick turnaround. After all, wasn’t the subprime problem in the US an isolated one, affecting just a small sector of that country’s property market? Weren’t the major economies of the world “decoupled” from each other, so that cracks in one wouldn’t appear elsewhere? Hadn’t central banks worked out how to run things smoothly and avoid sudden ups and downs? And weren’t we, in any event, all in the midst of a “long boom” which would last for decades, narrow the global poverty gap, and enable billions of people to enjoy a better life?

Of course, there were reasons to imagine that a temporary glitch would not lead to long-term pain. And of course, most people wanted to believe that everything was OK, and that soon conditions would return to normal.

But as things got steadily worse, opinions began to diverge. Some pundits argued that the trend would be V-shaped, with a short, sharp downturn followed by a rapid upturn. Others said it would be U-shaped: sharply down, bumping along the bottom for a while, then sharply up. Or perhaps a “bathtub” shape, with more time on the bottom. Or, worst of all, W-shaped, with a quick recovery followed just as fast by another nosedive. Even now, there are arguments about which of these is right, and whether or not the world is on the brink of a dreaded double-dip recession—or, God forbid!—a fully-fledged depression. So every day we’re treated to talking heads on business TV channels arguing vehemently for one view or another. And to widespread confusion.

Looking back, it’s clear that most economists misread what was to come. Optimists outnumbered pessimists by a wide margin. Most growth forecasts were too high. And even now, the human tendency to pounce on the positive and brush aside the negative continues to shape opinion.

A TROUBLING PICTURE

What’s ahead for the world economy depends primarily on what happens in just three places: the United States, Europe, and China. But it could also be impacted by events that are already unfolding elsewhere—in the Middle East, Afghanistan, Pakistan, Nigeria, Somalia, and so on. And given the recent surge in natural calamities, more “black swan” disruptions should not surprise us—but they will.

In a sharp downward revision, the World Bank recently forecast global economic growth of 2.5% this year, down from a June estimate of 3.6%. The Euro area may contract by 0.3%, down from a previous estimate of a 1.8% gain. The U.S. growth outlook was cut to 2.2% from 2.9%. The forecast for China was unchanged, at 8.4%—though the Chinese government has since cut its own forecast for the medium-to-long term to 7.5%.

Growth will be uneven. High-income economies are expected to grow by 1.4% this year, down from a June estimate of 2.7 percent while emerging economies will grow by 5.4%. However, there is many a slip twixt cup and lip, and predictions have been ratcheted down so fast recently that it makes sense to be edgy. Besides, there’s a risk that turmoil in the Eurozone and problems elsewhere will feed on each other, leading to a worse outlook for everyone.

The U.S. economy appears to be gaining steam: Consumer confidence is the highest in a year. January jobless claims were down for the third month in a row (albeit largely because a growing number of unemployed people have given up searching for work). Car sales have been accelerating for some time, as evidenced by General Motors’ announcement of a record $9.7 billion annual profit. On February 21, the Dow rose above 13 000 for the first time since 2008 (it’s up more than 60% on Obama’s watch). Companies are flush with cash, and some are starting to rebuild inventories.

But all is not well in the world’s largest economy. Gas prices are going up, and eating into household budgets. There has been no net increase in jobs for a decade, even though the population has grown. Wages and benefits are being cut. Home sales and prices keep falling, and a third of homeowners owe more on their mortgages than their houses are worth.

As USA Today reported on January 9, the nation’s debt of more than $15 trillion is now as big as the entire economy, and  growing faster. (The economy would have to expand by 6% a year to keep up!) President Obama’s budget sees debt of more than $26 trillion by 2022. And it’s sobering to reflect that Greece, Iceland, Ireland, Japan, Italy, and Portugal are the only advanced nations whose whose debts are bigger than their economies.

As if this sorry state of affairs were not worrying enough, political gridlock and a pandering to special interests is preventing necessary changes. Election-year rhetoric doesn’t help either. But whoever is sworn in as President in November faces the stark reality of that debt bomb, and will have to act fast and brutally to have any hope of dealing with it.

China, too, has hit a bump in the road (though many observers quip, “Which country wouldn’t welcome a drop in GDP growth to only 8% or so?”) It suits us to think it’ll keep powering ahead, because so much rides on that happening. But a slowdown has been in the making for a while, which could be worse than the World Bank thinks; some bearish analysts say growth of only 5% or 6% is likely.

Foreign direct investment into China has fallen sharply. Overseas customers are spending less, and Chinese exports are taking strain. A property bubble is inflating. Rising wage rates are starting to affect competitiveness, and Chinese companies are relocating manufacturing operations to other, lower-cost Asian countries. Social unrest has been spreading, and there are fears of more of it as new job seekers surge to the cities and many firms cut back on hiring.

However, Robert Zoellick, outgoing President of the World Bank, sees “a soft landing” for China. And Jim O’Neill, Chairman of Goldman Sachs Asset Management and author of The Growth Map, an excellent book on the rise of the BRIC nations, reminds us that “in the 6 weeks of 2012 so far, China will have created the equivalent of 1/2 another Greece.”

The Chinese central bank has just cut the level of reserves required of the country’s banks, to enable them to lend more easily. A range of other interventions is likely. In addition, China is under pressure to make much needed structural changes to its economy in coming years, and will surely tackle some of them. It will also continue its massive infrastructural spend, and keep importing raw materials. And its manufacturers will keep moving relentlessly up the value curve, churning out more high value-added products—at prices foreign competitors can’t match. So the 800-pound Asian gorilla will continue to grow at a good lick, and to play an increasingly pivotal role in the world economy.

And then there’s Europe—the elephant in the room. The region which has the rest of the world holding its collective breath.

According to the European Commission, the Eurozone is now in “mild recession.” Eight European economies will shrink in 2012—the double-dip we’ve been warned about. Better performance is possible, but it hinges on real progress in repairing the continent’s finances. And there’s no certainty this will happen.

For more than two years, Greece has been a nasty boil that should have been lanced and cleaned out decisively. But Europe is still kicking that can down the road. Doing as little as possible as late as possible to defer the inevitable. Pretending that if Greece gets a helping hand, it won’t default and leave the Eurozone, unleashing a wave of trouble across the continent—and the world. And imposing increasingly onerous conditions on a country that’s already on its knees, with truly pitiful prospects of lifting itself up.

Europe’s finance ministers have agreed to a second bailout package of $171 billion (€130 billion) by 2014, with private investors “voluntarily” writing off $53.3 billion of their Greek bonds (half of that country’s  private sector debt). In return, Greece must cut its budget deficit to 120.5% of GDP by 2020.

The architects of this charade are banking on Greek politicians being able to deliver their side of the bargain, and on voters in the countries Greece now relies on agreeing to all this. They’re hoping against hope, too, that the promise of yet another chunk of cash—which had to start flowing by March 20 to avoid Greece going bankrupt—will persuade rioting Greeks to get off the streets, accept even more crushing hardships for the next couple of decades, forget about state jobs for life, become successful entrepreneurs soon enough to buy their next meal, and rise past the humiliation of it all. Oh, and keep their money in Greece and pay their taxes!

While the Greek parliament has OK’d the deal, that’s just the beginning. Previous promises to reform came to nothing. Perhaps it’ll be different this time, because it’s clear there will be no quick or easy fix. But citizens will get angrier as life gets tougher for them. Igniting growth in Greece will be a very long, very hard slog. A Citigroup report warns that Greece is in for a long depression, and that its debt-to-GDP ratio will hit 160% by 2020, rather than the intended 120.5%. So there will come a time—quite soon—when the nasty truth has to be faced that Greece has to default, has to abandon the Euro, and has to paddle its own canoe.

The assumptions on which this bailout is based are daft. The chances that another bailout won’t be necessary are about zero. There’s a lot of agony to come—not least for the European banks that have been coerced into taking an ugly short-term “haircut” rather than face the prospect of losing everything. No one is sure just how bad the pain will be, but it will be bad. And it will be widely shared. And it will last a long time.

And that’s just Greece. There’s also Italy, Spain, Ireland, and Portugal. They’re all limping along on the edge of catastrophe, and a default by any of them would have worldwide repercussions that would be much worse than the Lehman effect. Their chances of simultaneously slashing their budgets and growing out of trouble are not good. So chances of further defaults—and resulting contagion—are high.

RE-THINKING ECONOMICS

The world is in the midst of a great economic experiment whose outcome is entirely uncertain. Capitalism is under siege. Governments are becoming more interventionist. Economists are rethinking their favorite theories. The Keynes vs. Heyek debate has a long way to run. The full impact of government stimulus efforts on the one hand, and austerity programmes on the other, is yet to be felt and understood.

So far, opinions are mixed. Nobel Prize-winning economist Paul Krugman, a long-time critic of the austerity camp, argues in his New York Times column of February 19 that things have been made worse than necessary “by the way Europe’s leaders, and more broadly its policy elite, substituted moralizing for analysis, fantasies for the lessons history.” Unfortunately, he adds, “the confidence fairy has failed to show up.”

In similar vein, Mohamed El-Erian, CEO of PIMCO, the largest US bond trader, warns that the lessons of Argentina a decade ago are being ignored by the financiers and politicians dealing with the Greek crisis today. Instead of boosting confidence, austerity measures in Argentina caused citizens to empty their bank accounts and spurred capital flight. The government failed to meet its policy commitments, social and political pressures mounted, and the country defaulted in December 2001.

But consider Britain—a clear leader in the austerity stakes. As David Smith points out in London’s Sunday Times of February 26, it’s on course to undershoot its £127 billion borrowing needs for 2011-12—perhaps by as much as £10 billion. Car manufacturers boosted production by 15.6% in January, compared to the same month a year ago. The CBI says export orders are well up on long-term averages. Austerity measures have not yet fully kicked in, but an analysis by Goldman Sachs says last year took the big hit.

To complicate matters, this high-stakes economic experiment is being conducted in a laboratory where scientists are coming and going, opinions are divided, political games are being played in the hallways, and surrounding societies are in spasms of anxiety. And it’s happening in a time of great change, when an array of major events is unfolding with the potential to throw even the best of plans off course and to radically affect our future.

Can you cut your way to growth? Will disgruntled citizens give governments the leeway to do their thing? What will become of the unemployed masses?

The world is undergoing a radical reset, not a minor tweak. There are no easy answers.

CRITICAL CHANGES ADD UNCERTAINTY

High unemployment has become a structural reality across the globe. Countless millions of people will never have a job in their lives—or get a new one. Countless millions will either retire later than they intend, or have to forget about retiring at all. Demographic shifts are altering the shape of societies: in some countries, the population is growing and young; in others, it’s slowing and old. Almost everywhere, people are streaming from rural areas towards towns and cities in the greatest migration ever.

The early promise of the “Arab spring” has given way to deep concerns about what comes next in the Middle East, and how events there will spill over into other regions. Iraq is still not at peace with itself. Afghanistan appears to be unravelling, and the Taliban are resurgent. Libya and Egypt are a mess. Syria is an unmitigated disaster. Iran’s obstinate stance over nuclear power could result in oil prices going through the roof and a nuclear race in its neighborhood (it also raises two questions with awful consequences: will Israel bomb first, or will Iran get a bomb first?)

Meanwhile, Nigeria is being torn apart by Boko Haram terror attacks and political strife. Terrorism is a growing threat in Kenya. Somali pirates are causing problems for shipping along Africa’s east coast, and hostage-taking is a growth industry. In major cities around the globe, the “Occupy” movement is already affecting views about the role and responsibilities of both both government and business, about social inequality, and about executive pay—debates that will surely intensify.

Coming months will see elections and possible leadership changes in some of the world’s most important countries. Outcomes of this year’s elections in Russia, France, and the United States are uncertain. In China, a succession process is under way with Vice-President Xi Jinping look set to to take the top job.

Other countries, too, have leadership issues. North Korea has just confirmed a 28-year-old, untested but belligerent new dictator, who is keen to prove himself.  Venezuela’s Hugo Chavez has cancer and may not be in office too much longer. Robert Mugabe will cling to power in Zimbabwe if his health holds up, no doubt to do further damage to his beautiful country. And South Africa will have a fractious year, as the ruling ANC gears up for its July policy conference and December elective conference, and politicians vie for power and tenders.

At the same time, extraordinary breakthroughs in technology are transforming industries, enabling companies to operate in new ways, and changing customers’ lives. Cyber-crime and attacks are becoming more plentiful, frequent, costly, and disruptive. And there’s growing pressure to deal with climate change.

In a year when Charles Dickens is being celebrated, his words from A Tale of Two Cities (1859) ring truer than ever: