In the last 6 months, the worldwide recession has taken hold and spared few countries. While the downturn clearly originated in those countries whose banks lent and citizens borrowed too recklessly, it is primarily exporting countries such as Japan and Germany who have so far taken the greater hit of the major economies.

As exporting and prudent countries felt less responsibility for the causes of the recession and presumed less susceptibility, so they have been less quick to enact stimulus. However it is precisely these countries that need to do most to stimulate internal demand. Citizens and governments of already indebted countries such the UK and the US have far less capacity to borrow further, and will be punished by markets if they choose to do so.

One lesson that might be learned from the economic imbalances that ultimately could not be sustained would be the need for greater self-sufficiency. It will inevitably become visible that there is no preferred direction of trade imbalance – all imbalances endanger. Countries can not forever rely on a constant stream of imports and a negative trade balance. It is far better to correct imbalances before markets dislocate and enforce correction in a damaging fashion. However, this should not be seen as a lurch to protectionism, but as a suggestion that economies need to be balanced and varied. One-dimensional economies, perhaps
dominated by construction or high-value technology, are vulnerable to severe retrenchment in industries as a result of economic shocks. Diversify the economy, and spread the risk.

Determined to signal protectionism was off the agenda, the G20 met recently in London. This was more of a chance to show a united front than to arrange policy – governments will always arrange policy out of perceived national interest. Instead the impression of international cohesion was key to improving the confidence of markets and consumers who have feared the sort of disunity that worsened the 1930s era. But did the G20 really achieve anything, certainly it was hailed as ‘historic’ with even Germany’s Angela Merkel acknowledging that it was a ‘triumph’ and the instant reaction on the markets was one of a global lift. It is maybe still too early to say if any of the measures agreed will actually have much of a long term effect, or even what form the ‘action’ will take. Being sceptical there is the question of how much of the US$1trillion pledged is really new money – US$250 billion has been earmarked to go to the IMF, and a further US$250 billion has been committed to help global trade, but the upfront contributions appear to be only around the US$3-4billion level.

There is bad news still to come now that the real economy has started to respond, with unemployment the next issue for governments. Further countries may go to the IMF following its increase in reserves. However the rapid rate of deterioration has been slowed and things look slightly better than six months ago.