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unbroken expansion, during which time it has grown at an annual average rate of 3.6%, well above the OECD average of 2.5%.

This resilience is partly its just deserts. The government has kept its budget in surplus, the central bank has largely kept inflation in check, and structural reforms have helped the economy handle shocks. But Australia also owes a lot to good luck. As a large commodity producer, it has been blessed by a surge in the prices of its exports thanks to booming global demand, notably from China. The country’s terms of trade (the price of its exports divided by its imports) have leapt by 30% over the past three years to their highest level for over 50 years.

Despite an enormous gain in its terms of trade, Australia still runs a huge current account deficit, close to 6% of GDP in the fourth quarter. Its export volumes have grown by only 1.5% a year since 2000, down from an annual average of 8% in the 1990s. Farm exports have been hurt by drought; manufactures by the rise in the exchange rate to a ten-year high. But the biggest disappointment has been in minerals. Thanks to past underinvestment, Australia cannot get as much stuff out of the ground or onto ships as it would like. Coal, for example, is Australia’s biggest export, accounting for one-fifth of its foreign earnings. But its sales are held back by the lack of port capacity.

Most worrying, the economy’s speed limit has fallen. Productivity growth has slowed to an annual rate of only 1.2% since 2000, from 2.4% in the 1990s. In the long run, a nation’s standard of living depends on its productivity. The commodity boom has so far concealed the slowdown, but even if prices stay high, further gains on this scale seem unlikely. Without further policy reform, the Australian kangaroo risks turning into a sleepy koala.

«We are the champions!» soccer fans chant when their team wins. Likewise, Americans are proud of their country's number-one position in the world economy. Yet, slowly but surely, team America is being overtaken in all sorts of economic rankings, both meaningful and meaningless.

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America used to be the world's biggest exporter. First it was pushed aside by Germany and now it has been outclassed by China, where merchandise exports exceeded America's in the second half of last year. China also produced more cars than the United States for the first time last year. And Toyota is widely tipped to overtake General Motors this year as the world's biggest car company.

In global finance, too, America and the dollar are being shoved off their pedestal. The dollar is still preferred by central banks as a reserve currency, but it is no longer the favourite form of cash for households and firms. There are now more euro notes and coins in circulation than there are dollars. In the international bond market, the euro has displaced the dollar as the main currency. And, according to the Financial Times, Wall Street's stockmarket capitalisation has now been eclipsed by Europe (admittedly taking a rather wide definition of Europe, which includes Russia). The world's biggest company is still American – at least according to Fortune, which put Exxon Mobil in pole position in 2006. In fact, Saudi Aramco, though not a listed company, boasts bigger revenues.

Europe's overtaking of America in some rankings is mainly due to the weaker dollar, which could be reversed. The more serious challenge comes from China, which has been growing three times faster. Goldman Sachs expects China's GDP (at market exchange rates) to top America's by 2027. On a purchasing parity basis, China is likely to become number one within just four years.

Of course, America still tops many league tables by a wide margin. For example, it is the world's biggest debtor nation; it guzzles the most energy; and it has the biggest prison population. But perhaps these are not things to boast about.

A winner in second place

There will be plenty of hand-wringing in the years ahead. But does being the biggest economy matter? It helps to ensure military superiority; it gives a country more say in fixing international rules; and as the issuer of the main reserve currency, America can borrow more cheaply. But being number one cannot be an end in itself. The goal of policy should be to maximise a country's absolute rate of growth, not its relative rate.

Losing top place in the economic league is different from being beaten in sport, where for every winner there is a loser. Economic competition is not a zero-sum game. China's economy will overtake

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America's not because the United States is in terminal decline, but because China is catching up. And faster growth in China and other emerging economies will benefit America's economy, not harm it. If an obsession with remaining number one foolishly caused America to adopt protectionist policies, that would reduce America's growth as much as China's. It is better to be number two in a fast-growing world than number one in a stagnant one.

Stronger China

Thanks to China, an American recession need not cause the whole world to crash

Economists have long warned that the world economy could not fly for ever on the single engine of American demand. A one-engine plane is more likely to crash. With its housing market blighted and its consumers growing fearful, America now faces a mounting risk of recession. The good news, however, is that the world has found some powerful new engines in China and other emerging economies. Even as credit markets seize up, a world economy that is less dependent on the United States is more likely to stay aloft.

The power of this new motor is startling. For several years, emerging Asian economies have accounted for more of global GDP growth than America has. This year China alone will for the first time accomplish the same feat all on its own (at market exchange rates), even as American growth holds up. American consumer spending is roughly four times the size of China’s and India’s combined, but what matters for global growth is the extra dollars of spending generated each year. In the first half of 2007 the increase in consumer spending (in actual dollar terms) in China and India together contributed more to global GDP growth than the increase in America did.

Of course, this silver lining has its cloud. A sharp slowdown in China now would have a much nastier global consequences than in the past, and the Chinese economy has weaknesses. But it does not look like getting into trouble over the next couple of years – the period in which America looks as though it may be feeble. If China can keep flying high, it will help keep the world economy safe.

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Of course, if America suffers a recession, then Asia’s exports will weaken. But this should not hurt GDP growth too much because other factors should help offset the weakening. It helps that China and most other Asian emerging economies are now exporting more to the European Union than to America. China’s exports to other emerging economies are growing even faster. It helps, too, that domestic spending has strengthened and is likely to stay strong: China alone with most of the rest of Asia, is one of the few parts of the world without a housing bubble.

If emerging Asian economies start to look weak, their governments have some scope to strengthen them. Most, with the exception of India, have small budget deficits; some even have surpluses. So if exports collapse, governments also have ample scope to boost domestic demand.

Commodity prices, too, will continue to feel the effect of the emerging economies’ increased importance. It is commonly assumed that an American recession would cause a sharp fall in the prices of oil and other commodities. But emerging Asia accounted for two-thirds of the increase in world energy demand over the past five years. So if Asia remains strong, commodity prices should too, and commodity-producing emerging economies such as Brazil, Russia and the Middle East will also continue to thrive.

Steady on

Emerging Asia cannot pick up all the slack if America goes into recession. Average world growth will slow – and, arguably, it needs to. But Asia can help to keep the world chugging along. Indeed, a modest slowing in the American economy could even help Asia in the long run if it forces governments to switch the mix of growth from exports to consumption and so make their future growth more sustainable.

Not so long ago, the rich world used to regard emerging economies as risky and unstable. That view needs to change: emerging economies now look like a force for stabilizing the world economy.

Turning their backs on the world

The economic meltdown has popularised a new term: deglobalisation. Some critics of capitalism seem happy about it—like

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Walden Bello, a Philippine economist, who can perhaps claim to have coined the word with his book, “Deglobalisation, Ideas for a New World Economy”. Britain’s prime minister, Gordon Brown, is among those who fear the results will be bad.

But is globalisation really ending? The world’s economies are certainly slowing fast. And the speed and scale of this recession are raising doubts about the assumptions that had underpinned the drive to integrate world markets. At the end of 2008 the IMF said the world economy would grow 2.2% in 2009, less than half the rate in 2007. Now it thinks growth will be just 0.5% this year, the lowest for 60 years. Even that may be optimistic; in the last quarter of 2008, some economies shrank at annualised rates of over 10%.

Nobody ever said globalisation had ended economic ups and downs, but this feels different: prima facie evidence of big problems at least, and possibly of the failure of globalisation to deliver many of its advertised benefits, especially to the poor. True, economic slowdown is not the same as deglobalisation. And the slowdown has yet to affect one thing. For years, poor countries have been growing faster than rich ones; so far, they still are. The gap between real GDP growth in emerging markets and in rich countries widened from nothing in 1991 to about five points in 2007—and, says the IMF, it will stay at 5.3 points in 2008 and 2009. Helping poorer countries catch up has long been among the benefits touted for globalisation.

And yet the process is going into reverse. Globalisation means the global integration of the movement of goods, capital and jobs. Each of these processes is now in trouble. World trade has plunged. As recently as the first half of 2008, boosted by rising commodity prices and a falling dollar, trade was growing at an annualised 20% in dollar terms. In the second half of 2008, as commodities sagged and the dollar rose, growth slowed fast; by September, says the IMF, it was in reverse. In December, says the International Air Transport Association, air-cargo traffic (responsible for over a third of the value of the world’s traded goods) was down 23% on December 2007—almost double the fall in the year up to the end of September 2001, a result affected by the 9/11 terror attacks.

The downturn has been sharpest in countries that opened up most to world trade, especially East Asia’s tigers. Singapore’s exports are 186% of GDP; its economy shrank at an annualised rate of 17% in the last three months of 2008. Taiwan’s exports are over 60% of GDP; and its economy may fall as much as 11% this year. The downturn has also

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hurt rich countries that specialise in staid old-fashioned manufacturing— supposedly a safer activity than the reckless delusions of finance. On average, says the IMF, rich countries will contract 2% this year. But Germany and Japan, big exporters of capital goods, cars and electronics, will do worse, their economies shrinking by 2.5% and 2.6% respectively. In the last quarter their economies contracted alarmingly, falling at an annualised rate of 8% in Germany and by 13%—the worst since 1974— in Japan.

Small countries which went into businesses that grew in globalisation’s wake, like tourism, are also suffering. The World Tourism Organisation says international tourist arrivals fell 1% in the second half of 2008, which may not sound bad, but compares with growth of more than 5% a year for the previous four years. In the Caribbean, visitors may fall by a third this season; in some islands hotels are half empty, flights are being cancelled and national budgets, reliant on tourism, are strained.

In contrast, the biggest emerging markets are doing less badly so far. In India, where exports are around 15% of GDP, the government recently said growth in the year to April 2009 would be 7.1%; most forecasters put growth for the 2009 calendar year lower, but still about 5%. In Brazil the economy has been harder hit by falling commodity prices and declining exports. Most economists still think output grew a bit in the year to the fourth quarter, and put growth for 2009 at 1.5% to 2%. China was still growing by 6.8% in the year to the fourth quarter, though like Brazil it is probably stagnating. Chinese exports fell 18% and imports 43% in the year to January. All three countries have large domestic markets and relatively stable banking systems, which have not been liberalised.

The gap between toothless tigers and friskier BICs (ie, BRICs minus Russia, a special case because of oil) raises questions not so much about globalisation as a whole—after all, Brazil, India and China have been beneficiaries—as about particular aspects. Can one be too dependent on trade? How far should one liberalise banking? Is there a trade-off between taking advantage of good times and providing shock absorbers for bad ones?

Emerging markets’ trade problems have been worsened by shifts in capital flows, globalisation’s second big plank. According to the World Bank, net private debt and equity flows to developing countries will fall from $1 trillion in 2007 to $530 billion in 2009, or from 7.7% to 3% of those countries’ GDPs. The Institute for International Finance sees an

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even steeper fall; it says that this year banks will extract more from emerging markets in debt repayments than they inject in new loans. Bond markets in those countries collapsed in the last quarter of 2008, doing less than $5 billion of business; in the second quarter, they had issued about $50 billion of bonds.

As with trade, financial deglobalisation is hitting countries in a variety of ways. In this case, East Asia has been less affected because most countries there are net creditors. But eastern Europe and Russia have been hammered because local banks went on a foreign-borrowing binge, foreign banks piled into their markets (and piled out again) and because some countries lacked insurance policies against tough times. Although many big emerging markets have built up foreign-exchange reserves and cut their external debts, in eastern Europe reserves have been flat, external debts have risen and currentaccount deficits have grown considerably in the past decade. In these countries, the reversal of globalisation has exacerbated problems that were building up anyway.

People in emerging markets have mixed feelings about financial liberalisation and may not regret its reversal. But foreign direct investment (FDI) is different. Most people welcome new factories and new jobs. FDI is also one of the commonest routes by which skills and technology are transferred from rich to poor countries.

This, too, is falling. The United Nations Conference on Trade and Development (UNCTAD) says worldwide FDI inflows shrank 21% in 2008 to $1.4 trillion. The World Association of Investment Promotion Agencies says FDI will contract by a further 12-15% this year.

In contrast to trade, the investment impact of the global downturn has so far been hardest on the countries where the woes began: rich ones. They have seen FDI falls of one-third on average and by half or more in Britain, Italy and Germany. Finland and Ireland have seen net outflows. FDI flows to developing countries were still growing in 2008, albeit by only 4%, after a rise of 21% in 2007. Flows to big South American countries were up by about a fifth; those to India more than doubled, though they may ebb as GDP falters.

The third of the three main aspects of globalisation—jobs—is following the other two, with a lag. The International Labour Organisation forecasts that unemployment worldwide will rise by around 30m above 2007’s level in 2009. Most of that rise will be the result of recession, not deglobalisation, but some will be attributable to the fall in trade (exporting companies will lay off workers) and some to

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declining investment (if expansion plans are cut, new jobs will not be created).

Deglobalisation will have a dire impact on migrants. In the past decade, more people have been moving voluntarily than ever before; now, some are going home. Those who provided labour for the housing boom in America (notably Latinos), Ireland (Poles) and China (rural Chinese going to cities on the eastern seaboard) have been among the first to be laid off. In Spain newly jobless builders are competing with migrants there for jobs picking fruit.

This will surely have an effect on the flow of remittances from rich countries to poor ones, although it has so far been quite resilient. In any case, economies that absorbed large numbers of foreign workers may take fewer. Some of the millions of South Asians who work in the Gulf, or the young Africans who flock to South Africa, or the Central Asians who work in Russia, may have to stay at home.

Yet for all the economic pain, the social and political fallout from deglobalisation has not yet been severe. Protests may still come. Or maybe national governments are absorbing most of the ire. In December, Greece saw riots after a police bullet killed a teenager. In France, unions brought over 1m people onto the streets for a one-day strike, and a riot in Latvia over economic policy ended in more than 100 arrests. But only in Britain, where workers have picketed refineries and power stations over the hiring of foreigners, has protest had a very anti-global tone.

This lag may be explained by residual support for globalisation, especially in emerging markets. A poll in 2007 by the Pew Global Attitudes Project found that majorities in 47 countries saw international trade as good for them; majorities in 41 out of 46 welcomed multinational firms; in 39 out of 47, most felt better off with a free market. In more than half the countries where changes could be tracked, support for free markets was rising.

When consensus wobbles

But is that still true? Last summer, on the eve of the meltdown, European Union pollsters reported that two-thirds of EU citizens saw globalisation as profitable only for large firms, not citizens. In 2002, according to the Pew poll, 78% of Americans thought foreign trade helped the country; by 2007 it was only 59%. A CNN poll in July 2008 showed that, for the first time, a small majority of Americans saw trade as a threat, not an opportunity.

Of the few worldwide polls to have been completed since then, one by Edelman for the World Economic Forum found that 62% of

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respondents in 20 countries said they trusted companies less or a lot less now. Manifestly, popular opinion backs more state regulation.

So far, this has mostly taken the form of pouring public money into banks and selected industries, notably cars. Last week Barack Obama set out plans for another vast bank rescue, and the French government promised €6 billion ($7.8 billion) in preferential loans to Renault and Peugeot-Citroën in return for pledges that no car factories would be closed in France.

There has been somewhat less evidence of trade protectionism. India has raised some steel tariffs. The EU has reintroduced export subsidies for some dairy products. Russia has raised import duties on vehicles. But there has also been movement the other way. The American Senate softened the “Buy America” provisions of the stimulus bill. Mexico said that by 2012 it would cut tariffs on thousands of kinds of manufacture. And some countries have sought a safe harbour, rather than embracing pure nationalism. East Europeans are even keener on the shelter of the euro; Iceland has applied to the EU; the Irish are more likely than they were to vote for the EU’s Lisbon treaty.

Despite the downturn, the nations of the world have not shunned globalisation. It has been protected by the belief of firms in the efficiency of global supply chains. But like any chain, these are only as strong as their weakest link. A danger point will come if firms decide that this way of organising production has had its day.

Why Layoffs and Cutbacks are Coming—and Soon

With demand sagging and funds for expansion drying up, Corporate America is under more pressure than ever to hit the brakes

Fragile economies are always vulnerable to shocks. This year the U.S. has been hit with two: an oil-related surge in inflation that slammed consumer spending last quarter, and a near-collapse of the financial system that is hammering growth this quarter. The double blow has left American businesses reeling and prospects for growth looking bleak. The speed with which companies, both domestic and foreign, are cutting back is striking. Some forecasters now think the economy could contract as much as 4% this quarter, a shrinkage reminiscent of the severe 1981-82 recession.

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The pressures on businesses to pull back on capital spending and hiring are far more intense than they were during the 1990-91 and 2001 recessions. Already, companies have reduced outlays for equipment and software for three quarters in a row. Business construction also has begun to sag in recent months as older projects are completed and plans for new ones are shelved for lack of financing. Companies are certain to step back even more quickly in coming quarters.

Corporate decisions to expand are based largely on perceptions of demand, and right now prospects both at home and abroad are increasingly discouraging. The 0.3% dip in third-quarter real gross domestic product was worse than that top-line number implied. Domestic demand in the U.S. fell a steep 1.8%, led by a plunge in consumer spending. U.S. demand posted its first annual contraction in 17 years, and that downtrend has further to run.

Despite cheaper gas, consumers are spending less again this quarter amid tight credit and mounting job losses. October retail surveys were weak. The month's 10.6 million annual rate of car sales was the lowest since 1983 and well below the poor 12.5 million rate averaged in the third quarter. Although a projected 33% drop in the quarterly average of gas prices will add some $140 billion to household buying power this quarter, consumers are more apt to save that windfall than spend it.

The falloff in October business activity was remarkable. The Institute for Supply Management's indexes for both manufacturing and nonmanufacturing fell sharply. The latter hit a record low, while the factory gauge fell to a 26-year low. A majority of the companies surveyed in both sectors said they had been affected by the financialmarket turmoil. The plunge in the ISM's index of export orders, also to an all-time low, was especially worrisome for future growth. It suggests exports, the largest single contributor to demand growth this year, are about to cave in under the weight of a global recession and a stronger dollar.

Weak demand isn't the only brake on business expansion. All sources of funding, including profits, debt, and equity, have either dried up or become too costly. Internal funds are shrinking as profits fall. So far in the fourth quarter, the ratio of negative to positive earnings guidance from companies is twice the long-run average, says Thomson Reuters, and the slowdown overseas further worsens the outlook. Over the past year the $81 billion rise in profits from abroad has cushioned the $197 billion drop in domestic earnings. That support will fade next year as domestic profits remain weak.

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