On 15 December, the International Monetary Fund warned that, without greater co-operation and collaboration at an international level, the global economy risked sliding into a 1930s-style slump. "The world economic outlook at the moment is not particularly rosy. It is quite gloomy," the IMF managing director, Christine Lagarde, told reporters.
But how gloomy will it get in 2012? Are we in for a double-dip recession? A depression? A lost decade, even?
George Magnus, senior economic adviser at UBS Investment Bank, was one of the few economists to predict the sub-prime meltdown in 2008. "If we define a depression as a sustained period in which world output is stagnant or falling, then I'd say there is a one-in-five chance," he says when asked what the odds are of a global depression occurring next year. "But the chances are rising."
Ann Pettifor, director of Advocacy International and another member of the select band of economists who predicted the crash, tells me how some of her more overoptimistic peers have been wrong before. "In 2010, most economists were far more worried about inflation [than deflation]," she says. In an interview with the Times in September 2009, Pettifor warned that the worst of the slump was yet to come. She is scathing about the role played by the banking sector, which "built up huge, unpayable" debts. "The banks of all the major OECD economies will likely collapse over the next few months. The UK, the eurozone and the US will be dragged down by the banks, not vice versa."
As the banking and corporate sectors as well as households continue to deleverage their mountains of debt and as economic activity contracts, "debt deflation will accelerate", says Pettifor, citing the Yale professor Irving Fisher's 1933 paper "The Debt-Deflation Theory of Great Depressions". Fisher, described as "the greatest economist the United States has ever produced", explained how recessions could morph into depressions through a deflationary spiral, with bad debts leading to weakened banks, provoking further asset sales and pushing prices down sharply. Pettifor believes that, having "wrongly and myopically" blamed the public rather than the private banking sector for the debt crisis, "Politicians are now hell-bent on austerity, which will simply accelerate the downward spiral of debt-deflation."
Despite sharing her Keynesian concerns about the growth-choking consequences of fiscal self-flagellation, Jonathan Portes, director of the National Institute for Economic and Social Research (NIESR) and former chief economist at the Cabinet Office, is more optimistic. "In the eurozone, there will be both too little policy co-ordination on the reforms needed to boost growth and too much self-defeating austerity but, ultimately, it will not be allowed to come apart. This will lead to recession but not depression, as the northern Europeans realise that austerity alone will not prevent disaster."
So, will the euro survive? "We are definitely not out of the woods, but the eurozone should muddle through."
Yet what if it doesn't? What if there is a disorderly break-up of the zone? "The consequences for the UK range from the damaging to the disastrous." There would, Portes predicts, be an instant and negative impact on our exports, if only through a sharp rise in the value of the pound, and the onset of a possible recession. "The wildcard is the financial system," he notes. "If a break-up was accompanied by systemic disruption to the global financial system, which is clearly a significant possibility, then all bets are off."
The NIESR director believes that ultimately the EU leadership will see reason. Yet the Germans, obsessed with the hyperinflation of the 1920s, rather than the deflation that followed it in the 1930s, refuse to consider the case for fiscal stimulus and want to institutionalise austerity in a new "fiscal pact". President Nicolas Sarkozy is too weak and distracted by the run-up to the French presidential elections in April to offer any determined resistance. Our own Prime Minister, David Cameron, is hobbled by his ideological attachment to austerity and rolling back the state. Meanwhile, in an interview with the Financial Times on 19 December, the new, Italian president of the European Central Bank, Mario Draghi, refused to countenance any bond-buying or quantitative easing by the ECB, preferring to extol the virtues of fiscal consolidation and stressing the need for "credibility". He insisted: "There's no trade-off between fiscal austerity, and growth and competitiveness."
The do-nothing ECB, Pettifor argues, is a "perversion of what a central bank should be" - a lender of last resort, an institution willing to do whatever it takes to underwrite public debts across the European Union and committed to ensuring not just price stability, but growth and employment, too. "The European Central Bank does not serve the interests of wider society, including industry and labour, but just the interests of finance."
Denouncing the Teutonic and Anglo-Saxon obsession with counterproductive fiscal consolidation, Pettifor paints a gloomy picture of Europe in 2012. "Austerity will contract the economy and shrink private incomes, which will mean debts to private banks will not be repaid. A contracting economy will result in shrinking tax revenues, which will worsen the state of public finances - and make the possibility of sovereigns repaying their debts to the private banks in Europe less likely. This in turn will accelerate the bankruptcy of the private banking system."
Less pessimistically, Magnus argues that "the political glue that binds the euro area together is still pretty strong". Yet he, too, worries that 2012 will "bring the prospect of [eurozone] fragmentation much closer", which "doesn't bear thinking about". And, he fears: "There's every chance that by this time next year Europe will have slipped into a sort of depression, with little cause for optimism that 2013 will bring better prospects for the US and China."
The US economic recovery, measured from the official start of the national recession in December 2007, has been weaker than any since the Second World War - but there are signs of "green shoots". The economy grew faster than expected in the third quarter of 2011.
“The US has gone through a wrenching period of adjustment in the labour and housing markets," Portes explains. "The Federal Reserve has provided unprecedented monetary support, and at some point things have to turn round, given that there's not that much wrong with the underlying macroeconomy."
Barack Obama's re-election chances could depend on this analysis being correct. Not since Franklin D Roosevelt in 1936 has a US president succeeded in winning a second term with unemployment above 7.2 per cent. In November, the national unemployment rate suddenly fell to 8.6 per cent, the lowest since March 2009, yet it is unlikely to drop below 8 per cent by the end of 2012. A Republican victory next November - be it by "moderate" Mitt Romney or by the Tea-Party-backed Newt Gingrich - would result in the US embracing not just greater austerity, but isolationism, this at a time when, as the IMF notes, international co-operation and solidarity are critically important. "Europe is able to take care of [its] own problems," Romney declared in a Republican presidential debate in November.
How low can it go?
The world's new economic superpower offers not much more cause for cheer. Given the size of China's output and its influence, a recession would translate, in all likelihood, into a double dip for the world economy. In a New York Times column on 18 December, Paul Krugman, the Nobel Prize-winning economist, speculated about whether the Chinese bubble was bursting. Property prices in China have fallen for three consecutive months, and in November the manufacturing sector unexpectedly shrank for the first time since 2009.
Portes agrees. "The obvious potential 'risk' is China. I don't see how the current political/ economic equilibrium is sustainable in the medium to long term, and the potential for a very disruptive transition - who knows to what? - is high."
Magnus says he considers a "hard landing" of the booming Chinese economy, caused by plummeting property prices, or a collapse in Chinese exports to an imploding eurozone, or both, to be a "big risk" and the "elephant in the room". "If we say a hard landing in China is GDP of 3-4 per cent, I'd say the odds are about 30 per cent," Magnus predicts.
Jonas Parello-Plesner, an expert on China at the European Council on Foreign Relations, believes that the Chinese might avoid a setback in the coming year through further fiscal and monetary stimulus, but that will just "kick the can further down the road and postpone the large-scale structural reforms to the Chinese economy that are urgently needed. It just means a harder landing in 2013." And, he says: "Remember, a lot of us here in the west have been betting on the Chinese consumer to save us and buy our Louis Vuitton bags."
The autocrats in Beijing must be worried. Riots in December by residents of the southern Chinese fishing village of Wukan against the economic and social policies of the Communist Party attracted widespread attention, at home and abroad. And next autumn, the 18th National Congress of the Communist Party of China will bring significant changes to the leadership of the party, the state and the military - including the presidency and the premiership - as a new generation takes over.
“If growth falls to 4 per cent, Chinese social stability could be impaired in a year in which the leadership is changing, and the economic impulse into Asia, world trade and the global economy would be hugely negative," Magnus says . "Oil and commodity prices could plunge, endangering stability in key oil producers like Saudi Arabia and Russia." (However, he jokes, "oil at $30 a barrel" would be the equivalent of "a massive tax cut for the west".)
The consensus forecast is that China is likely to grow at somewhere between 8 and 9 per cent in the coming year, but it is questionable how much we can trust such estimates. After all, 2011 has been the year of downgrades - not just of sovereign debt ratings by credit rating agencies, but of economic growth by the great and the good of the forecasting world. The Office for Budget Responsibility has lowered UK growth projections for 2012 three times in 18 months, the Bank of England six times, the Organisation for Economic Co-operation and Development twice, and the IMF once.
The OBR's current projection is for growth of just 0.7 per cent in 2012. Portes's NIESR estimates a 70 per cent risk of a double-dip recession in 2012. And the OECD has predicted a recession for the UK in the first half of the year.
Either way, as Magnus puts it, "the UK economy looks set to continue to deteriorate going into 2012". The best outcome as things stand "would be stagnant growth and a restrained rise in unemployment".
But how high will unemployment go in 2012? Even before the government's cuts in public spending have begun to bite, it stands at 8.3 per cent in Britain (or 2.64 million people) - a 17-year high. In France, it has reached 9.7 per cent; in Spain, it's 21.5 per cent.
If 2011 was the year of the Budget deficit, 2012 could be the year of the social deficit. Lost decades create lost generations. "High youth unemployment will do permanent social and economic damage," Portes says. There are more than 7.5 million jobless young people across the EU, a million of whom are in the UK. So will we see further protests or violence on the streets of European cities?
“The scope for social or civil unrest is often correlated with the degree of economic despair and with economic depression," Magnus says. "On this basis we should all be braced for more of it in 2012." But, he adds, "The climate for violent or protracted resistance to social and political change in the UK is different from that in southern Europe and France."
Pettifor acknowledges the potential for renewed rioting in the UK in 2012, but believes that, "More likely, as unemployment rises and people are evicted from their home, and as incomes fall, frustration and anger will rise, but people are likely to turn in on themselves rather than riot. We are more likely to witness the silent break-up of families as people emigrate, divorce and commit suicide." Consider this: before the 2008 crash, Greece had the lowest suicide rate in Europe. It now has the highest.
So, brace yourself. If the eurozone collapses, or if the Chinese have a hard landing, or if the US recovery stalls, or if, God help us, all of the above occur, the world will be on the verge of another major economic and financial crisis.
There might be one crucial difference between next year and 2008. As the Bangladeshi economist, microfinance pioneer and Nobel laureate Muhammad Yunus tells me on page 32, we should be prepared to endure "not the same crash, [but] a worse crash".
We can only hope that he's wrong. Happy New Year.
Mehdi Hasan is senior editor (politics) of the New Statesman and the author of "The Debt Delusion" (Random House, £3.74 ebook)