The US’s selfish war on inflation will tip the world into recession

Phillip Inman in The Guardian


As the Fed raises interest rates, dollar-denominated loans become an unsustainable burden to states around the globe

The Federal Reserve is planning a second interest rate rise in a year this month. Photograph: Chris Wattie/Reuters 


Later in July US interest rates are expected to jump for a second time this year, and that’s going to wreck any chance of a global recovery.

The Federal Reserve could push its base rate up by as much as a full percentage point, ending 15 years of ultra-cheap money, intended to promote growth.

This jump, to a range of 2.5%-2.75%, would take the cost of borrowing money in the US to more than double the Bank of England’s 1.25%. And yet the Fed could just be taking a breather as it contemplates even higher rates.

This column, though, is not about the US. It is concerned with the terrible impact on Britain and countries across the world of America’s selfish disregard when it decides to tackle high inflation with higher borrowing costs. Britain is already feeling the effects of the Fed’s pledge to tackle inflation until it is “defeated”, come what may.

Higher interest rates in the US make it a more attractive place for investors to store their money. To take full advantage, investors must sell their own currency and buy dollars, sending the price of dollars rocketing higher.

In July the US dollar increased in value against a basket of six major currencies to a 20-year high. The euro has slipped below parity with the dollar in the last few days. The pound, which has plunged by more than 10% this year to below $1.20, is losing value with every week that passes.

In Japan, the central bank has come under huge pressure to act after the yen tumbled to its lowest level against the dollar since 1998.

There are two important knock-on effects for those of us that live and work outside the US.

The first is that goods and raw material priced in dollars are much more expensive. And most commodities are priced in dollars, including oil.

Borrowing in dollars also becomes more expensive. And while getting a loan from a US bank is beyond the average British household, companies do it all the time, and especially those in emerging economies, where funds in their backyard can be in short supply.

The Bank of England interest-rate setter Catherine Mann recently said that her main motivation for wanting significant increases in the UK’s lending rates was her fear that the widening gap with the dollar was pushing up import prices. And higher import prices meant higher inflation.

If only she could persuade her colleagues on the Bank’s monetary policy committee that the devaluation of the pound was a serious issue, maybe they would push up the Bank’s base rate in line with the Fed rate increases. After the Fed makes its move, more may join her.

Until January this year, Britain’s inflation surge was on course to be short-lived. Now it seems the Russian invasion of Ukraine and a splurge of untargeted handouts by the Biden administration during the pandemic, which have served to push up prices in America, will keep inflation in the UK high into next year. 

Those governments that have borrowed in dollars face a double whammy. Not only will they need to raise domestic interest rates to limit the impact of import price rises, they will also face a massive jump in interest payments on their dollar borrowings.

Emerging markets and many developing-world countries will be broke when these extra costs are combined with a loss of tourism from the Covid pandemic. Sri Lanka has already gone bust and many more could follow.

For the past three decades, western banks have marketed low-cost loans across the developing world as a route to financial freedom.

Zambia’s government borrowed heavily before the pandemic to become self-sufficient in electricity. It is a laudable aim, but has left the central African state with a ratio of debt to national income (GDP) much the same as France’s – about 110%.

The problem for Zambia is not the same as for France, which pays an interest rate of 1.8% to finance its debts, measured by the yield on its 10-year bonds. The Zambian 10-year bond commands a rate of 27%. Now Zambia, like France and so many other countries, must borrow simply to live. To invest is to borrow more.

There is no sign that the US will change course. Joe Biden is in a panic about the midterm elections, when fears of spiralling inflation could favour the Republicans. This panic has spilled over to the Fed, which has adopted hysterical language to persuade consumers and businesses that higher rates are coming down the track and to curb their spending accordingly.

The Fed knows inflation is a problem born of insufficient supply that only governments can tackle. But that doesn’t look like stopping it from pushing the US economy, and everyone else’s, into recession.

Beware the great 2016 financial crisis, warns leading City pessimist

Larry Elliot in The Guardian

Albert Edwards joins RBS in warning of a new crash, saying oil price plunge and deflation from emerging markets will overwhelm central banks, tip the markets and collapse the eurozone.

 

Are the doommongers right – are we heading for a big global economic fall? Photograph: Dennis M. Sabangan/EPA

The City of London’s most vocal “bear” has warned that the world is heading for a financial crisis as severe as the crash of 2008-09 that could prompt the collapse of the eurozone.


Albert Edwards, strategist at the bank Société Générale, said the west was about to be hit by a wave of deflation from emerging market economies and that central banks were unaware of the disaster about to hit them. His comments came as analysts at Royal Bank of Scotland urged investors to “sell everything” ahead of an imminent stock market crash.

Sell everything ahead of stock market crash, say RBS economists



“Developments in the global economy will push the US back into recession,” Edwards told an investment conference in London. “The financial crisis will reawaken. It will be every bit as bad as in 2008-09 and it will turn very ugly indeed.”


Fears of a second serious financial crisis within a decade have been heightened by the turbulence in markets since the start of the year. Share prices have fallen rapidly and a slump in the cost of oil has left Brent crude trading at barely above $30 a barrel.

“Can it get any worse? Of course it can,” said Edwards, the most prominent of the stock market bears – the terms for analysts who think shares are overvalued and will fall in price. “Emerging market currencies are still in freefall. The US corporate sector is being crushed by the appreciation of the dollar.”

The Soc Gen strategist said the US economy was in far worse shape than the country’s central bank, the US Federal Reserve, realised. “We have seen massive credit expansion in the US. This is not for real economic activity; it is borrowing to finance share buybacks.”

Edwards attacked what he said was the “incredible conceit” of central bankers, who had failed to learn the lessons of the housing bubble that led to the financial crisis and slump of 2008-09.

“They didn’t understand the system then and they don’t understand how they are screwing up again. Deflation is upon us and the central banks can’t see it.”

Edwards said the dollar had risen by as much as the Japanese yen had in the 1990s, an upwards move that pushed Japan into deflation and caused solvency problems for the Asian country’s banks. He added that a sign of the crisis to come was the collapse in demand for credit in China.

“That happens when people lose confidence that policymakers know what they are doing. This is what is going to happen in Europe and the US.”

Europe has shown tentative signs of recovery in the past year, but Edwards said the efforts of the European Central Bank to push the euro lower and growth higher would come to nothing in the event of a fresh downturn. “If the global economy goes back into recession, it is curtains for the eurozone.”

Countries such as France, Spain and Italy would not accept the rising unemployment that would be associated with another recession, he said. “What a disaster the euro has been: it is a doomsday machine in favour of the German economy.”

The warning from Edwards came as stock markets had a respite from the wave of selling seen since the start of the year. The FTSE 100 index rose by 57 points to close at 5,929, while the Dow Jones Industrial Average was up by 10 points in early trading in New York.

The mood in equity markets was helped by intervention by the People’s Bank of China overnight to support the yuan, with the Chinese currency moving higher on foreign exchange markets.

But the slide in the oil price continued, with Brent crude falling a further 3.5% to close in London at $30.45. Oil has not been below $30 a barrel since 2003.

Edwards joked that after years in which he has tended to be a lone voice, other institutions were also becoming a lot gloomier about global prospects.

He was referring to the RBS advice, which warned that investors face a “cataclysmic year” where stock markets could fall by up to 20% and oil could slump to $16 a barrel.

In a note to its clients the bank said: “Sell everything except high-quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.” It said the current situation was reminiscent of 2008, when the collapse of the Lehman Brothers investment bank led to the global financial crisis. This time China could be the crisis point, RBS said.

Is the game up for China’s much emulated growth model?

Jayati Ghosh in The Guardian



Illustration by Robert G Fresson



Whatever happened to emerging markets? Brics, Mints, whatever global investors call them: For a while it appeared as if countries such as Brazil, India and Turkey had secure and buoyant futures, regardless of the travails of advanced economies. There was much trumpeting of their advantages, such as the demographic bulges producing young populations. Few asked about the nature of the growth, or whether it could last. The euphoria spread, leading to large private-capital inflows that pushed up asset prices in these countries.

That already seems a long time ago, as investor opinion has done yet another volte face. Investors who were slow to read the tea leaves during the boom times have now taken fright. In just 13 months, capital outflows from these countries have crossed $1tn. Stock markets have tanked across countries as distant and diverse as Malaysia, India, South Africa and Brazil; currencies have depreciated; and bond issues are slowing down, with fewer takers.

For a change, this is not being driven by policy in the developed world. Unlike the “taper tantrum” unleashed in mid-2013 by Ben Bernanke, the then US Federal Reserve chairman – when he simply announced the possibility of reducing the massive liquidity stimulus that was being provided in the US – the current skittishness in emerging markets is the fallout of what is happening in China. This is hugely important, not just because of China’s major role in global trade, but because it signifies the end of a particular growth strategy that many other countries were trying to emulate.

The recent travails of China’s economy are well known by now: falling real estate prices put paid to the construction boom, and the subsequent bursting of the stock market bubble was hamfistedly controlled through official measures. But these current difficulties are the outcome of earlier economic strategies that were widely celebrated, when the going was good.

From the early 1990s China adopted an export-led strategy that delivered continuously increasing shares of the world market, fed by relatively low wages and very high rates of investment, enabling massive increases in infrastructure. It led to big increases in inequality and even bigger environmental problems, but the strategy seemed to work – until 2008-09, when exports were hit by the global financial crisis.

Yet even then, China, India and other large emerging markets continued to grow. The talk at the time was that they were already “decoupled” from the west. In reality, China (and much of developing Asia) had simply shifted to a different engine of growth without abandoning the focus on exports. The Chinese authorities could have generated more domestic demand by stimulating consumption through rising wage shares of national income, but this would have threatened their export-driven model. Instead they put their faith in even more accumulation to keep growth rates buoyant.

So the “recovery package” in China essentially encouraged more investment, which was already nearly half of GDP. Provincial governments and public sector enterprises were encouraged to borrow heavily and invest in infrastructure, construction and more production capacity. To utilise the excess capacity, a real estate and construction boom was instigated, fed by lending from public sector banks as well as “shadow banking” activities winked at by regulators. Total debt in China increased fourfold between 2007 and 2014, and the debt-GDP ratio nearly doubled to more than over 280%.

We now know that these debt-driven bubbles end in tears. The property boom began to subside in early 2014, and real estate prices have been stagnant or falling ever since. Chinese investors then shifted to the stock market, which began to sizzle – once again actively encouraged by the Chinese government. The crash that followed has been contained only because the government pulled out all the stops to prevent further falls.

All this comes in the midst of an overall slowdown in China’s economy. Exports fell by around 8% in the year to July. Manufacturing output is falling, and jobs are being shed. Construction activity has almost halted, especially in the proliferating “ghost towns” dotted around the country. Stimulus measures such as interest rate cuts don’t seem to be working. So the recent devaluation of the yuan– which has been dressed up as a “market-friendly” measure – is clearly intended to help revive the economy.

But it will not really help. Demand from the advanced countries – still the driver of Chinese exports and indirectly of exports of other developing countries – will stay sluggish. Meanwhile, China’s slowdown infects other emerging markets across the world as its imports fall even faster than its exports and its currency moves translate into capital outflows in other countries.

The pain is felt by commodity producers and intermediate manufacturers from Brazil to Nigeria and Thailand, with the worst impacts in Asia, where China was the hub of an export-oriented production network. Many of these economies are experiencing collapses of their own property and financial asset bubbles, with negative effects on domestic demand. The febrile behaviour of global finance is making things worse.

This is not the end of the emerging markets, but is – or should be – the end of this growth model. Relying only on exports or debt-driven bubbles to deliver rapid growth cannot work for long. And when the game is finally up, there can be severe political fallout. For developing countries to truly “emerge”, a more inclusive strategy is essential.

Global tremors: bure sitare can bring bure din i.e. bad stars can bring bad days

Swaminathan Aiyer in the Times of India

Narendra Modi’s first six months in office reflected “achhe sitare” (lucky stars) more than “achhe din” (good days). But luck can turn nastily. Suddenly, dark global clouds over Russia (and maybe even China) signal the risk of “bure din” (bad days) ahead.

Is last week’s rouble collapse the start of a debacle like the 1997-99 Asian Financial Crisis? Will the Chinese slowdown end in a hard landing? The chances are probably no more than 10-15%, but India could suffer serious pain.

The 1997-99 crisis was sparked by the exit of foreign investors from all emerging markets, causing currencies and commodity prices to crash. Russia and other countries defaulted on foreign debt. The crisis spread globally, exposing all emerging markets as brothers in vulnerability.

Last week, the Russian rouble, once worth 30 to the dollar, collapsed to 70 before recovering a bit to 60. The slide began with western sanctions, was exacerbated by falling oil prices, but became a debacle only when panicky investors (and Russians) began fleeing roubles for dollars. This crisis is one of finance more than oil.

Other emerging market currencies have also fallen, from 5% for India to 15% for Turkey. Crashing oil prices threaten to bankrupt Venezuela and Nigeria. If any countries default on foreign debt, the contagion could infect many emerging markets (as in 1997).

China has slowed from 12% growth to a projected 7.5% this year. Even this estimate looks inflated, says analyst Ruchir Sharma: growth of car and electricity sales is just 2%, and demand growth for steel and oil is zero. This is the biggest reason for the halving of prices of iron ore, coal and oil. China’s high growth boosted all world economies in the 2000s. Its slowdown may sink them.

Indians are delighted with the fall in oil and food prices. Wholesale price inflation is zero. What’s not to like? Alas, if commodity prices fall enough to wreck important economies, panic can cause global finance to flee all emerging markets, sinking country after country. What started as a Thai financial crisis in 1997 snowballed into a gigantic collapse of all emerging economies. This caused India’s GDP and industrial growth to crash, many companies went bust, and the Sensex halved from its peak. The rupee fell from Rs 35 to 49 per dollar between 1997 and 2001.

Today, India and all other emerging markets today are much better prepared to face a financial crisis. They have substantial forex reserves, lower current account deficits and foreign debt ratios, and bigger contingency borrowing arrangements. Yet some (notably Russia, Nigeria and Venezuela) look vulnerable.

West Asian oil exporters are major destinations for Indian exports and labour, so crashing oil prices can mean a steep fall in India’s exports to and remittances from the Gulf. This will be offset by cheaper oil imports, but the equilibrium may be reached at a slower GDP growth rate.

Foreigners find western bond yields very low, and so have invested over $5 trillion in higher-interest bonds in emerging markets like India. But when the local currency begins to depreciate, bond investors rush out: their potential currency losses far outweigh potential gains from higher interest rates. That outflow was evident last week.

Global finance may be poised to exit from emerging markets anyway with the end of quantitative easing and expected rise in US interest rates in mid-2015. Remember, when the Fed indicated higher interest rate in August 2013, a tidal wave of dollars exited all emerging markets. This took the rupee from Rs 55 to Rs 68 per dollar and the Sensex crashed. That panic subsided in a few months. The Fed said it would not raise rates for quite some time. Money flooded back into India and other emerging markets in 2014. Modi’s victory and the promise of reform made India a global favourite, and dollars flowed in.

Can global events now spark another panicky outflow of 2013 magnitude, driving down the rupee and stock markets? It’s possible, though not probable. Of the $43 billion of foreign financial inflows in 2014, $36 billion went into bonds. So a bond outflow could be very large. India is much better paced to withstand this than it was last year, yet could suffer a lot.

Let’s not overdo alarmism. Today’s financial panic may subside and be reversed, just as in late 2013. The US Fed may decide not to raise interest rates in 2015 given ultra-low inflation. So, emerging market currencies and stock markets may rise again.

Yet we stand warned. Optimists like finance minister Jaitley predict 6.5% GDP growth for India next year.

But none should assume a painless upward path. We can hope for achhe din, but must prepare for the possibility of bure din.

Emerging market rout threatens wider global economy

The $9 trillion (£5.8 trillion) accumulation of foreign bonds by the rising powers of Asia, Latin America and the emerging world risks going into reverse as one country after another is forced to liquidate holdings to shore up its currency, threatening to inflict a credit shock on the global economy.

Fears of Fed tightening have pushed borrowing costs worldwide to levels that could threaten global recovery Photo: AFP

By Ambrose Evans-Pritchard in The Telegraph

8:38PM BST 22 Aug 2013

India’s rupee and Turkey’s lira both crashed to record lows on Thursday following the US Federal Reserve releasing minutes which signalled a wind-down of quantitative easing as soon as next month.

Dilma Rousseff, Brazil’s president, held an emergency meeting on Thursday with her top economic officials to halt the real’s slide after it hit a five-year low against the dollar. The central bank chief, Alexandre Tombini, cancelled his trip to the Fed’s Jackson Hole conclave in order “to monitor market activity” amid reports Brazil is preparing direct intervention to stem capital flight.

The country has so far relied on futures contracts to defend the real – disguising the erosion of Brazil’s $374bn reserves – but this has failed to deter speculators. “They are moving currency intervention off balance sheet, but the net position is deteriorating all the time,” said Danske Bank’s Lars Christensen.

A string of countries have been burning foreign reserves to defend exchange rates, with holdings down 8pc in Ecuador, 6pc in Kazakhstan and Kuwait, and 5.5pc in Indonesia in July alone. Turkey’s reserves have dropped 15pc this year.

“Emerging markets are in the eye of the storm,” said Stephen Jen at SLJ Macro Partners. “Their currencies are in grave danger. These things always overshoot.” 

It was Fed tightening and a rising dollar that set off Latin America’s crisis in the early 1980s and East Asia’s crisis in the mid-1990s. Both episodes were contained, though not easily.

Emerging markets have stronger shock absorbers today and largely borrow in their own currencies, making them less vulnerable to a dollar squeeze. However, they now make up half the world economy and are big enough to set off a crisis in the West.

Fears of Fed tightening have pushed borrowing costs worldwide to levels that could threaten global recovery. Yields on 10-year bonds jumped 47 basis points to 12.29pc in Brazil on Thursday, 33 points to 9.72pc in Turkey, and 12 points to 8.4pc in South Africa.

There had been hopes that the Fed might delay its tapering of bond purchases, chastened by the jump in long-term rates in the US itself. Ten-year US yields – the world’s benchmark price of money – have soared from 1.6pc to 2.9pc since early May.

Hans Redeker from Morgan Stanley said a “negative feedback loop” is taking hold as emerging markets are forced to impose austerity and sell reserves to shore up their currencies, the exact opposite of what happened over the past decade as they built up a vast war chest of US and European bonds.

The effect of the reserve build-up by China and others was to compress global bond yields, leading to property bubbles and equity booms in the West. The reversal of this process could be painful.

“China sold $20bn of US Treasuries in June and others are doing the same thing. We think this is driving up US yields, and German yields are rising even faster,” said Mr Redeker. “This has major implications for the world. The US may be strong to enough to withstand higher rates, but we are not sure about Europe. Our worry is that a sell-off in reserves may push rates to levels that are unjustified for the global economy as a whole, if it has not happened already.”

Sovereign bond strategist Nicolas Spiro said India is “caught between the Scylla of faltering growth and the Charybdis of currency depreciation” as hostile markets start to pick off any country with a large current account deficit. He said India’s central bank is playing with fire by reversing its tightening measures to fend off recession. It has instead set off a full-blown currency crisis that is crippling for companies with dollar debts.

India is not alone. A string of countries across the world are grappling with variants of the same problem, forced to pick their poison.

Emerging markets (BRICs) mania was a costly mistake: Goldman strategist

 

 

Goldman Sachs executive Mossavar-Rahmani argues that the net gains for US stock markets may just be a taste of the reassertion of western dominance that may emerge in the next few years.

Reuters | Jul 4, 2013, 09.17PM IST

LONDON: Investors who wrongly called time on US economic supremacy during the financial crisis are set to pay a hefty price for betting too much on the developing world, according to a top Goldman Sachs strategist. 

The US investment bank helped inspire a twenty-fold surge in financial investment in China, India, Russia and Brazil over the past decade, its chief economist popularizing the term BRICs in a 2001 research paper. 

Sharmin Mossavar-Rahmani, in charge of shaping the portfolios of the bank's rich private clients, has been arguing against that trend for four years, however, trying to persuade investors and colleagues they were safer sticking with the developed world. 

The past six months has substantially vindicated that view. China's boom is finally wobbling under the weight of economic imbalances including an undervalued currency, and emergingstock markets are down 13 per cent compared to an 11 per cent rise in the US S&P 500 index over the same period. 

"Many investors and market commentators have been too euphoric about China over the last decade and this euphoria is finally abating. Many just followed the herd into emerging markets and over-allocated to many of the key countries," she says. 

"It is easier to be part of the herd even if one is wrong, than stay apart from the herd and be right in the long run." 

The net gains for US stock markets may just be a taste of the reassertion of western dominance that may emerge in the next few years, Mossavar-Rahmani argues. 

Structural advantages like abundant mineral wealth, positive demographics and, most importantly, inclusive, well-run political and economic institutions make the United States the best bet going forward, she says. 

"(Emerging market) investors are taking on so many risks compared with the US where the risk is largely cyclical rather than structural," she says. 

Many of the cyclical issues affecting the US such as high levels of debt, are also on their way to being resolved. 

"One thing that normally puts investors off from increasing their US holdings is the long term debt profile, but we think the magnitude of the work done to address this has been underappreciated by investors," she says. 

West is best 

The idea that authoritarian countries are less effective than open economies like the US at incentivising entrepreneurship and innovation is long accepted in academia. 

Daron Acemoglu and James Robinson laid out the case for doubting the emerging power of China and others in a book 'Why Nations Fail' last year, arguing poor institutions that entrench inequality will hamper a country's path to prosperity. 

But this view was largely put aside by professional investors who allowed themselves to be swept up in a "mania" about the rewards up for grabs in emerging markets, especially China. 

The widely held position, enhanced by the crisis of 2007-8, was that the developed world was entering a long decline and the best prospects for investors would be found in emerging markets, particularly in Asia. 

That prompted a boom in emerging market themed equity funds, which in Europe multiplied from 13 in 2002 to 67 in 2012 according to Lipper, a Thomson Reuters company that tracks the funds industry. 

Lipper data also shows the balance of money flowing into emerging market themed equity funds globally, including those focused on the BRICs, soared from 2.42 billion euros in 2008 to 51.23 billion euros in 2012. 

In contrast, equity funds overall lost 21.5 billion euros in 2012. 

Unrest 

China's efforts to rebalance its economy from an export dependent to consumer-led model is likely to bring slower growth, more market volatility and greater potential for social unrest - a worrying trinity of red flags for foreign investors who have poured cash into China in recent years. 

Meanwhile, mass protests are causing political crisis in Brazil and investors are fretting about ponderous, economically stifling bureaucracy in India. South Africa, sometimes called a fifth BRIC, is also struggling with a tide of labour unrest and infrastructure and social problems. 

Data from fund tracker EPFR Global shows investors pulled out a record $10 billion from emerging markets debt and equity funds in the week to June 28. 

Mossavar-Rahmani argues investors should not base decisions so heavily on which countries post the most impressive economic growth numbers, a temptation to which she says many succumbed when overallocating money to China. 

Even when countries enjoy rapid economic growth, the increases in GDP do not equate to similar jumps in investment returns, she says, citing a study published in 2005 by the London Business School. 

"If you rank the world's economies from fastest to slowest in terms of growth, the fastest-growing quintile actually generate the lowest investment return while the slowest third deliver the highest," she said.

Brics miracle over as world faces decade-long slump

US Conference Board fears Brics miracle over as world faces decade-long slump

The catch-up boom in China, India, Brazil is largely over and will be followed by a drastic slowdown over the next decade, according to a grim report by America’s top forecasting body.

Image 1 of 3

China’s double-digit expansion rates will soon face, fallng to 3.7pc from 2019-2025 as the aging crisis hits. 

By Ambrose Evans-Pritchard

7:37PM GMT 13 Nov 2012

377 Comments

Europe's prognosis is even worse, with France trapped in depression with near zero growth as far as 2025 and Britain struggling to raise its speed limit to 1pc over the next three Parliaments.

The US Conference Board’s global economic outlook calls into question the "BRICs" miracle (Brazil, Russia, India, China), arguing that the low-hanging fruit from cheap labour and imported technology has already been picked.

China’s double-digit expansion rates will soon be a romantic memory. Growth will fall to 6.9pc next year, then to 5.5pc from 2014-2018, and 3.7pc from 2019-2025 as the aging crisis hits and investment returns go into "rapid decline".

Growth in India - where the reform agenda has been "largely derailed" - will fall to 4.7pc to 2018, and then to 3.9pc. Brazil will slip to 3pc and then 2.7pc. Such growth rates will leave these countries stuck in the "middle income trap", dashing hopes for a quick jump into the affluent league.

"As China, India, Brazil, and others mature from rapid, investment-intensive ‘catch-up’ growth, the structural ‘speed limits’ of their economies are likely to decline," said the Board. 

The fizzling emerging market story is a key reason why the West has relapsed this year. The world is now facing a synchronized downturn all fronts, with little scope for fiscal and monetary stimulus.

^{France slumps to bottom of the class, with Britain close behind}

"Mature economies are still healing the scars of the 2008-2009 crisis. But unlike in 2010 and 2011, emerging markets did not pick up the slack in 2012, and won’t do so in 2013," it said.

The Conference Board says Europe’s demographic crunch and poor productivity has reduced trend growth to near 1pc, though it could be worse if the region makes a hash of monetary policy and follows Japan into a "structural deflation trap". Large numbers of people may be shut out of the jobs market forever.

Germany will outperform Italy and France massively over the next five years, implying a bitter conflict within EMU over control of the policy levers. While the report does not analyze debt-dynamics, it is hard to see how the Club Med bloc could keep its head above water in such a grim scenario or stop political revolt coming to the boil.

Bert Colijn, the Board’s Europe economist, said France’s woes stem from low investment, as well as delayed austerity and reform. The reckoning will now come.

He thinks Spain will fare better since it has already taken its bitter medicine. It is expected to grow at 1.8pc for the next decade as "Schumpeterian" creative destruction clears away dead wood and unleashes fresh energy - a contentious point since labour economists argue that unemployment of 25.6pc is doing permanent damage to parts of the workforce, and therefore to economic potential.

America has a younger age profile and should eke out 2.5pc to 3pc growth until 2018, and 2pc thereafter. It has a big "output gap" of 6pc of GDP to close before it hits any speed limit, so part of this is just the effect of elastic snapping back.

^{Emerging markets deflate}

The Board said lack of demand lies behind the current global malaise, but the fading technology cycle may prove a greater threat over the long-term.

The thesis is based on work by professor Robert Gordon from Northwestern University, who argues that the great innovation burst of the last 250 years is a "unique episode in human history" and may be fading. His claims challenge the work of Nobel laureate Robert Solow - orthodoxy since the 1950s - that economic growth is a perpetual process once the right legal and market framework is in place.

The Conference Board’s forecast is starkly at odds with a report by the OECD last week predicting that China would keep growing at 6.6pc until 2030, and India at 6.7pc -- propelling the two rising powers to global dominance.

Apostles of the BRICS revolution are certain to dispute the claims. Yet there could be no clearer sign that the emerging market euphoria of the last decade has fully deflated.