Recent economic history has been so dominated by the credit
crunch of 2008-09 that it is easy to forget what happened in the decades
before. But looking back 15 years or so is instructive—in terms of both what to
do and what to avoid. Then, as now, the United States was in the vanguard of a
disruptive digital revolution. The advent of the internet spawned a burst of
innovation and euphoria about America’s prospects. By 1999 GDP was rising by
more than 4% a year, almost twice the rich-country average. Unemployment fell
to 4%, a 30-year low. Foreign investors piled in, boosting both the dollar and
share prices. The S&P 500 index rose to almost 30 times earnings; tech
stocks went wild.
The optimism in America stood in stark contrast to gloom
elsewhere, as it does today. Japan’s economy had slipped into deflation in
1997. Germany was “the sick man of Europe”, its firms held back by rigid labour
markets and other high costs. Emerging markets, having soared ahead, were in
crisis: between 1997 and 1999 countries from Thailand to Brazil saw their
currencies crash as foreign capital fled and dollar-denominated debts proved
unpayable.
Eventually, America ran into trouble too. The tech-stock
bubble burst in early 2000, prompting a broader share price slump. Business
investment, particularly in technology, sank; and as share prices fell,
consumers cut back. By early 2001 America, along with most of the rich world,
had slipped into recession, albeit a mild one.
America the powerful
Inevitably the parallels are not perfect. The biggest
difference is China, a bit-part player in 1999 and now the world’s
second-biggest economy, contributing disproportionately to global growth. But
there are three trends at work that destabilised the world economy then and
could do the same now.
The first is the gap between America, where growth is
accelerating, and almost everywhere else, where it is slowing. In the late
1990s Larry Summers, then the US deputy treasury secretary, warned that the
world economy was “flying on one engine”. For 2015 The Economist’s panel
of forecasters expects 3% growth in America, compared with 1.1% in Japan and
the euro area. China’s growth rate may fall to around 7%.
Americans can comfort themselves that, as in the late 1990s,
the optimism gap is partially warranted. Jobs are being created in their
country faster than at any time since 1999, cheap petrol has buoyed consumer
spending and business investment has picked up. But the news is not all good:
cheaper oil could tip plenty of America’s shale producers into bankruptcy in
2015, while a stronger dollar and weakness abroad will hurt exporters—just as
they did 15 years ago. Britain, the other Anglosphere champion, may also be
clobbered by the euro zone’s woes.
The second worrying parallel with the late 1990s is the
dismal outlook for the rich world’s two other big economies. Germany’s growth
rate has tumbled to around 1% and there is a deeper malaise caused by years of
underinvestment, a disastrous energy policy and a government that is too
obsessed by its fiscal targets to spend money and too frightened of its voters
to push through the sort of structural reforms that Gerhard Schröder
implemented in 2003. Meanwhile Japan has repeated the error it made in
1997—thwarting its escape from stagnation with a premature rise in consumption
tax.
The third echo of the 1990s is the danger in emerging
markets. Back then the problem was fixed exchange rates and hefty foreign debt.
Now the debts are lower, the exchange rates float and most governments have
built up reserves. Still, there are growing signs of trouble, especially in
Russia. But other commodity exporters also look vulnerable, especially in
Africa.
Fear the hangover
Add all this up and 2015 seems likely to be bumpy. Bears
will bet that a surging dollar coupled with euro-zone torpor and a few
emerging-market crises will eventually prompt a downturn in America. On the
plus side, stockmarkets do not look as frothy as they did in the 1990s: the
price/earnings ratio of the S&P 500 is 18, not far above its historical
average. Although many big tech firms are investing recklessly, most have
decent balance-sheets.
But if the world economy does stumble, restoring stability
will be harder this time round because policymakers have so little room for
manoeuvre. Back in 1999 the Federal Reserve’s policy rate was around 5%,
leaving plenty of scope for cutting when the economy slowed. Nowadays interest
rates all over the rich world are close to zero.
The political scene is also different, and not in a good
way. At the end of the 1990s most people in the rich world had enjoyed the
fruits of the boom: median American wages rose by 7.7% in real terms in
1995-2000. Since 2007, by contrast, they have been flat in America, and have
fallen in Britain and much of the euro zone. All over the rich world voters are
already grumpy with their governments, as polling numbers and their willingness
to vote for protest parties show. If they are squeezed next year discontent
will turn to anger. The economics of 2015 may look similar to the late 1990s,
but the politics will probably be rather worse.
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