Economic truths - From doom to a worrisome boom - If a week is a long time in politics, a year in global economics is an eternity - as Britain, America and Asia have all discovered to their delight.
What a difference a year makes. In this column 12 months ago I wrote about the widespread fears that the world was on the brink of a slump. President Clinton agreed, saying the global economy was facing its worst crisis in 50 years.
Alan Greenspan, the redoubtable chairman of the Federal Reserve Board added that, in his experience, he had never seen conditions like those prevailing in the financial markets.
Gloom was all around. Russia had collapsed, Asia was on its knees, Japan economically stagnant and Europe, far from celebrating the approaching single currency with a powerful cyclical upturn, appeared, with one or two exceptions, to have caught the mood of depression. Britain, with an over-strong currency, a monetary and fiscal tightening in place (higher interest rates and taxes) and at a mature stage of the cycle, appeared recession-bound.
Only America, shining like a beacon of growth, appeared immune - though vulnerable to being dragged down by the growing financial market crisis.
One day, perhaps if Greenspan ever writes his memoirs, we shall know how close the global financial system came to collapse as a result of the spectacular failure of Long Term Capital Management, a leading hedge fund. What we know now is that the last three months of 1998 represented the nadir of the crisis. Britain escaped recession but briefly stagnated, with zero growth in the final quarter. Germany and Italy experienced a short-lived fall in gross domestic product.
By early this year, the picture gradually began transforming itself.
Asia's crisis-hit economies returned to robust growth sooner than anybody had dared to expect. Japan performed the economic equivalent of a dying man doing the 100 metres in 10 seconds, growing at an annualised rate of 8% in the first quarter. By the second quarter, helped by an interest rate cut by a reluctant European Central Bank, Europe had joined the party, with rising business confidence and economic activity.
In Britain, too, the gloom was dispelled, the economy returning to trend growth (2% or so) on an annualised basis in the spring. And through it all, America powered on, the crisis of autumn 1998 but a distant memory in an economy propelled along by stock market gains and a belief that, this time, it really could be different, with no nasty aftereffects in the form of inflation.
There is, sadly, no such thing as a steady state when it comes to economic opinion. Relief that the economy had managed to escape the abyss quickly gave way to fears that it was doing so too quickly. Fears of a bust, in other words, gave way to concern that the world economy had embarked on an unsustainable boom and that remains the position as I write this.
Perhaps the most tangible evidence of the shift has come in the price of oil. Even a few months ago, it was a common view that the world oil price, having fallen below $10 a barrel, was headed even lower as a result of weak demand and supply indiscipline by the producers. A new OPEC production agreement earlier this year, framed with the intention of boosting prices, was greeted with widespread scepticism.
But the oil price, far from heading south, has firmed more than OPEC could have hoped, topping $20 a barrel, and introducing a new and significant dimension to the inflation risk in Western economies.
More generally, global financial markets are seen by economists to have experienced a 'growth shock'. Stronger growth means that Europe is no longer on the brink of deflation while Japan can escape from its grip.
Meanwhile the prospect of synchronised growth, with Europe, Japan and America all expanding together, means upward pressure on commodity prices and, ultimately, inflation.
Let us, however, put matters into perspective. All that has happened in Europe is that the cyclical upturn expected last winter has belatedly arrived, and this after years of disappointing growth. In Japan, so accustomed have people become to false dawns for the economy that the consensus is that this could well be another one. Either that, or the economy will only be sustained on its recovery path by another substantial exercise in official pump-priming. Economies elsewhere in Asia may be returning to growth but they are a long way from their pre-crisis growth rates of 7%-8% a year and highly dependent on exports.
The synchronised growth story is also vulnerable to a bigger danger.
What happens if the third leg of the stool, America, chooses this very moment to collapse? Sooner or later, all those warnings about the unsustainability of the US boom are going to prove justified. The facts are that since last autumn's crisis, Wall Street is up by about 50%, the US current account deficit has widened and financial market tensions have returned.
None of this means disaster is going to strike. The international capitalist system is more resilient than some gave it credit for last autumn. But, with the world economy still convalescing, this is no time to worry about unsustainable global booms.