World view bleak but picture looks brighter in the Middle East

As stock markets take a beating and policymakers across the world try to resuscitate economic growth, observers say a return to a global downturn would be an all-out disaster for investors, businesses and average consumers everywhere.

Financial Fallout: Read The National's coverage of the global economic chaos

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If consumers scale back amid higher unemployment and fear for their financial futures, businesses would suffer because of declining demand. Many companies would choose not to invest in new factories or research and development, worried that returns would not justify costs.

Declines in global markets could breed more consumer panic when investors look at their brokerage statements and find themselves poorer. Investment banks that grease the wheels of global capital would see their fortunes decline, too, with fewer mergers to advise on and less investment advice to give.

The world has yet to lurch back into a situation akin to 2008's slowdown, but recent market declines and worse than expected economic data from the US and Europe have fuelled speculation another crash might be imminent.

"There's going to be a dampening in global economic activity," says Dr Giyas Gokkent, the chief economist at National Bank of Abu Dhabi. "The stock price declines will create a wealth effect, but the scenario now is slower global growth - but growth nevertheless.

"For things to turn into a meltdown of the type we saw in 2008 there would have to be some major policy mistakes in the euro zone."

The problems facing the world economy now are legion, and span both emerging and developed countries in the Americas, Asia and Europe.

US consumers - the wealthiest group of consumers in the world - spent less money in June than the month before, according to recent official data. That was the first spending decline in two years. Manufacturing activity in the world's largest economy is also stagnant, recent figures showed.

And with worry still surrounding its US$14.3 trillion (Dh52.52tn) of government debt, the US's credit rating was recently downgraded by Standard & Poor's to "AA plus", the first time the country has had its rating reduced.

Europe has its own set of ills to contend with, most prominently a crippling sovereign debt crisis that started in Ireland, Greece and Portugal but now threatens to spread to Spain and Italy.

The European Central Bank recently kept interest rates at 1.5 per cent in an attempt to spur lending, and began buying up the debt of its troubled countries. Germany wants to avoid spending billions of euros on another bailout just to keep the euro zone intact, but it might have to if it wants to keep the single-currency bloc's shaky economic union intact.

Asia's fast-growing emerging countries are also increasingly on the ropes, although economists still hold out hope they will perform better than Europe and the US if another downturn takes hold.

Most emerging Asian countries do not have major debt woes, and their banking systems are generally in good shape.

"Another sharp fall in global output would see Asia hit hard initially," Gareth Leather, an Asia Economist at Capital Economics in London, said in a recent note.

"However, as in 2009, Asia's strong economic fundamentals should ensure that the region would recover relatively quickly."

afitch@thenational.ae