The world shuts up shop

There is an increased focus on domestic issues: cheap, home-based pursuits are making a comeback, and frippery is out. Australians spent 13 per cent less on eating out in the last quarter of 2008, while a Manhattan dentist is pitching his teeth-whitening services with the phrase "Make me an offer".

The challenge is to come up with a political response that does not make things worse. Western countries used to preach openness, free movement of people, the breaking down of barriers. Now the instinct is to raise the shutters and protect voters' livelihoods. Social unrest is spreading; particularly at risk are the nations of central and eastern Europe, which fervently embraced the free market after the Berlin Wall came down. As their workers headed west, their businesses loaded up on debt to fuel breakneck expansion; now, they can't meet their obligations.

The world's leaders promise to stop protectionism, but that is not how they are acting. (Adrian Michaels)

IN FLORIDA, a state devastated by tumbling house prices and repossessions, the inhabitants are arming themselves against recession, with requests for concealed-weapon permits up 42 per cent in the past 45 days. In Moscow, the murder rate has climbed by 16 per cent. At Tetsuya's — the most exclusive and expensive restaurant in Sydney — the waiting list has shrunk from three months to 24 hours.

We have been told that we are in the worst economic crisis for 20 years, then 30, then 80, then 100. It can't be long before someone points out that really, all things considered, the Black Death was comparatively pleasant. But beyond the hyperbole, one thing is clear: what began as a financial problem in certain debt-soaked nations is battering the economies of dozens of others, as well as millions of people working in almost every trade. It will change behaviour, and alter the pecking order of the world's economies.

Among the most significant developments has been the realisation that the most prudent countries — such as Germany, Japan and China — will suffer as badly, or even worse than, the spendthrifts. Despite the whiff of hubris that wafted from Berlin when the banks of Britain and America went into meltdown, Germany's economy contracted by up to 2 per cent in the last quarter of 2008, compared with 1.5 per cent for Britain's.

The problem was that the Chinese and Germans were too thrifty: their countries' growth was reliant on sales of goods to countries that were borrowing. Now that Americans can't afford its products, China's exports have collapsed, down 17.5 per cent from a year ago.

Americans can't spend because their house prices have crumpled, their shares have plummeted and banks will not — or cannot — lend them any money. Insecurity is also forcing cutbacks: January saw the highest monthly jump in unemployment in 34 years.

The equally worried Chinese seem to want to save still more: imports into China fell 43 per cent in January compared with the year before. Yet if no one at home or abroad wants to buy their goods, the result will be massive unemployment: some 20 million people are already said to have lost their jobs. As they head home from the coastal manufacturing belt, their Government is trying to force-feed them consumer goods; 80 per cent of all white goods sold in December were subsidised.

As demand dries up, the arteries of global trade are hardening. Lufthansa's air freight division is putting 2600 staff on short-time working, while cargo ships have so many empty containers that shipping rates are a 10th of what they were at last year's peak. The knock-on effects are complex, but painful. "For Rent" signs dot empty storefronts on the once sought-after stretch of New York's Madison Avenue, where the vacancy rate rose by 50 per cent in 2008. A falling appetite for luxury goods helps explain why half of India's 400,000 diamond workers have lost their jobs. More than 40 have committed suicide.

Or take car sales, which Carlos Ghosn, the chief executive of Renault-Nissan, estimates could fall by 21 per cent across the world this year. Car companies are begging governments for hand-outs — but that won't shift their products from showrooms. Among other things, lower car sales mean fewer catalytic converters, which means that platinum does not need to be mined so intensively and Anglo Platinum, which operates mostly in South Africa, is axing 10,000 jobs.

Migrant workers are being asked to leave countries, which will mean a fall in remittances, a lifeline for the world's poorest people. Africans working in the developed world have been sending back up to $40 billion a year to support their impoverished relatives, but the World Bank predicts that this could drop substantially this year.

There is an increased focus on domestic issues: cheap, home-based pursuits are making a comeback, and frippery is out. Australians spent 13 per cent less on eating out in the last quarter of 2008, while a Manhattan dentist is pitching his teeth-whitening services with the phrase "Make me an offer".

The challenge is to come up with a political response that does not make things worse. Western countries used to preach openness, free movement of people, the breaking down of barriers. Now the instinct is to raise the shutters and protect voters' livelihoods. Social unrest is spreading; particularly at risk are the nations of central and eastern Europe, which fervently embraced the free market after the Berlin Wall came down. As their workers headed west, their businesses loaded up on debt to fuel breakneck expansion; now, they can't meet their obligations.

The world's leaders promise to stop protectionism, but that is not how they are acting. Britain and Italy are propping up their car industries while professing opposition to protectionism. Congress wants to protect the American steel industry; the French Government is spending more on newspaper advertising. However restless they are, electorates need to remember that a lack of protectionism lay behind a huge increase in prosperity for millions of people. That is not easy when jobs are being lost.

A cleaned-up banking system is a top priority — but the debate has only just started about how our banks are to look, who will run them and how they will be regulated. "The history of financial crises," warns Michael Pettis, professor of finance at Peking University, "shows a mismanagement of the regulatory framework that comes out of them."

Above all, consumers are somehow going to have to change their behaviour. Americans are certain to be more prudent for now, but they need to maintain a hostile attitude to debt when the immediate crisis is over. It will be just as hard to persuade the Chinese, Japanese and Germans to start spending to supplement export-led growth with domestic demand. "The world doesn't need more stuff to sell," explains Professor Pettis, "it needs more buyers."

As they mature, Asian economies will in time have better pension and health systems, which will help persuade people that there is a safety net for hard times, and tease money out from under the mattress. "Surplus countries have to spend their income and enjoy themselves," says Charles Dumas, an analyst at Lombard Street Research. "The purpose of an economy is to consume." Right now, though, the main objective is survival. (Adrian Michaels)