Little attention was paid to the news on the day, but it quickly became apparent that not only BNP Paribas but almost every major financial institution was up to its neck in non-performing US mortgage-linked securities. In early August 2007, the BNP was just the pebble that marked the coming avalanche. Another August, another crisis. Memories of 2007 were rekindled by Andrew Bailey last week when the Governor of the Bank of England announced that interest rates are rising just as the UK economy is expected to hit the wall. Leaving aside the pandemic-induced collapse in activity, the last “proper” global recession was the global financial crisis of 2007-09, a period in which only massive government bailouts prevented the collapse of the banking system. The Bank of England believes the recession it expects will last as long – five quarters – as the recession of 2008-09, but will be less severe. Output, as measured by gross domestic product, is projected to decline by just over 2% compared with nearly 6% in the late 2000s recession. The other good news is that – as far as we can tell – the global banking system is in a better position to withstand losses than it was 15 years ago. Regulations are tighter, capital buffers larger. That said, the banks were also considered to be in good shape in mid-2007. However, there are other ways in which the two crises differ that should be cause for concern. For starters, the previous crisis followed a prolonged 15-year recovery in the global economy. Growth was strong and living standards rose steadily. Cheap imported goods from China and other emerging market economies kept inflation low. Since then, growth has been anemic, living standards have fallen and inflation is now running at its highest level in four decades. The warning signs of future trouble have been flashing for some time. In terms of policy room to deal with a crisis, finance ministries and central banks were in a much better position in 2007. Public debt levels were low, official interest rates were around 4-5%, quantitative easing was forthcoming. Governments felt they had room to spend more and tax less, while central banks had room to aggressively cut borrowing costs and embark on massive QE bond-buying programs. Today the Federal Reserve, the European Central Bank and the Bank of England are all raising interest rates, even as the US economy has shrunk for the past two quarters and the Eurozone and UK economies are headed for recession. If there were not high rates of inflation, all three central banks would cut interest rates and not raise them. The central bank’s goal is to act countercyclically: to raise interest rates during a boom and lower them in a recession. Far from easing recessionary pressures, the Fed, ECB and Bank of England are adding to them. Faced with central banks determined to reaffirm their anti-inflation credentials, finance ministries face a choice: stick to their deficit-reduction plans or seek to ease the pain of recession by spending more or taxing less . If they have sense, they will prefer the last option. A second notable difference between 2009 and today is the collapse of international cooperation. When Gordon Brown hosted a summit of G20 leaders in London in April of that year, it seemed that a new era was dawning in which developed economies – such as the US, Germany and Japan – and leading emerging market countries such as China, Brazil, India and Russia – would act together to revive the global economy. The unity of the G20 frayed as the global economy stabilised, but now it has all but disappeared. Russia’s invasion of Ukraine has prompted economic sanctions from the West, and the Kremlin has responded in kind by cutting off natural gas supplies and raising energy costs. Vladimir Putin will have seen the Bank of England’s decision to raise interest rates despite the UK’s looming recession as a small victory in the economic war. If Ukraine is an example of a deglobalizing world, then Taiwan is another. Already poor relations between Washington and Beijing have further worsened following a visit to Taiwan by US House Speaker Nancy Pelosi and the economic, military and diplomatic measures China announced in response. In 2009, China was seen more as an economic partner than a geopolitical threat. It had been admitted to the World Trade Organization in 2001, and G7 central bankers – such as then Bank of England governor Mervyn King – said there could be no real solution to the world’s major problems without Beijing at the table. Subscribe to the Business Today daily email or follow Guardian Business on Twitter @BusinessDesk The mood is different now. The supply chain chaos caused by Covid-19 has created demands for greater self-sufficiency. China’s threat to Taiwan – the world’s largest semiconductor producer – will accelerate this trend. No country is going to risk being cut off from supplies of components that are vital to so many products. Deglobalization may not be bad for the planet if it means smaller, heavy-handed supply chains with less carbon. But not if it means breaking up global agreements to reduce carbon emissions. Worryingly, one area in which China says it will stop cooperating with the US as a result of Pelosi’s visit is climate change. The crisis of 2007-09 briefly united the countries. The crisis of 2020-22 sowed division and revealed some painful truths. Real recovery from 2009 never happened and the world is rudderless in an era that is getting hotter, poorer and angrier.
