Akio Okawara

Executive Director
Sumitomo Shoji Research Institute, Inc.

We are well into autumn, with the end of the year in sight. Looking back over 2008, I cannot think of any other year in which the first half and second half have been so different in terms of the economic picture. In this column during the first half I wrote about inflation-related topics, including the high price of gasoline, the food crisis, and the rise of the euro. But from around August the situation took a sharp turn as the financial crisis in the United States spread across the globe. Instead of inflation, we now face deflation, with prices of all sorts of materials plunging. Crude oil, which reached a record high of $147 a barrel (WTI) in July, has recently fallen below $60 a barrel, and the markets are whipsawing from day to day.

As the financial crisis continues unabated, some commentators have been suggesting that we face a global depression. It is true that the combination of phenomena like the stock market plunge, serial bank failures, and shakiness of the reserve currency is reminiscent of the onset of the Great Depression of the 1930s. This time, however, governments and central banks have been responding with countermeasures of unprecedented speed and scale, determined not to repeat the mistakes of that time. The financial summit that convenes today in Washington represents one important step toward achieving the international coordination that will be essential in weathering the crisis. Also, there is little chance that today's world will succumb to the folly of protectionism seen at the time of the Great Depression, which resulted in a sharp decline in global trade. Another difference with the 1930s is the dynamic growth of the emerging economies in today's world.

In view of the above considerations, it is probably fair to judge that we will be able to avoid another Great Depression. Since the scale of the crisis and the countermeasures that have been adopted is unprecedented, it is hard to predict the level of effectiveness they will have, but sooner or later we can expect to see an end to the credit crunch that is now acting as a brake on the real economy. Our basic scenario is for the US economy to contract through the January–March quarter next year and then start to grow again, albeit at a modest rate.

Though the financial crisis is the worst seen since the Great Depression and thus can reasonably be labeled a "once in a century" event, we need to bear in mind that the state of the real economy is not such as to plunge the world into a downward spiral like that of the 1930s. The US economy shrunk by almost 30% from October 1929, when the stock market crashed, to 1932, and the unemployment rate surged to 25%. The current situation is of course serious, but we need to keep it in proper perspective by comparison with the Great Depression experience.

It is hard to find cheerful news these days, but as they say, every night has its dawn—and as they also say, it is always darkest before the dawn. Let us hope to see the global economic skies brighten again next spring.