The decade prior to the bursting of the dotcom bubble saw a spell of relatively strong growth for the global economy, driven to a large extent by rapid expansion in the US and the Asia-Pacific region. This was despite the prolonged malaise in Japan, the brief but painful crisis which affected Asian economies in 1997-98, and the ongoing traumas of many ex-Communist countries.

Global economic activity expanded, on average, at a rate of around 3.5% throughout the 1990s. Real growth (i.e., adjusting for the effects of inflation) reached 4% or better in 1996, 1997 and 2000. Even in 1998, in the immediate aftermath of the Asian crisis, global GDP still increased by nearly 3%.

The rate of growth during the 1990s was slightly higher than in the 1980s, although the decade was characterised by wider divergence. Extremely rapid growth was achieved in many countries in south-east Asia, so much so that the combined output of all developing Asian economies more than doubled in the ten years to 2000.

In contrast, there was a deep and prolonged contraction in the former Communist countries of eastern Europe and the Soviet Union. Between 1989 and 1995, activity slumped by a third. It was not until 2000 that this grouping out-paced the world economy as a whole.

Source: IMF World Economic Outlook

The eventual ending of the dotcom boom in the spring of 2000 ushered in tougher times for the global economy. In rapid succession, there were the attacks on America (‘9/11’), the uncertainties leading up to the war in Iraq and then the US/UK led recession and credit crunch. Until 2008-09, the global economy as a whole, however, showed remarkable resilience.

Annual growth stayed above 3% in the four years from 2004 to 2007 until in 2008, it dropped to 1.5% and then in 2009 turned negative (-2.3%) for the first time in the post-1945 era. Most areas of economic activity have been affected. In the heavily indebted economies such as the US and UK, for example, the asset price bubbles burst, confidence evaporated, unemployment rose and output growth went into reverse.

But even the better-balanced economies, such as Germany, also suffered as their export markets stalled. This, in turn, created problems domestically in the key industrial sector, with knock-on effects on employment and spending. And, as trade volumes diminished, so cross-border investment flows also fell away. The speed of the downturn and the extent of the problems were unprecedented.

Indeed, the most recent turbulence has been the first time since the oil shocks of the mid and late 1970s that the global economy faced an all-out general recession. Negative growth was avoided 35 years ago, but not this time. In the 1990s, the weakest year was 1991, when growth dipped to just under 2%, thanks to recession in the US, a slowdown in Europe, and a collapse in activity in the countries of eastern Europe and the former Soviet Union.

Source: IMF World Economic Outlook

Among the advanced countries, the big difference in the 1990s compared with the previous two decades was Japan’s fall from grace and the resurgence of the US.

Throughout the 1980s, Japan’s real GDP had grown at an average annual rate of around 4% a year, well ahead of the US and major European economies. But the bursting of a speculative asset price bubble in 1989 precipitated a prolonged economic slump which eventually evolved into deflation. Since 1991, GDP growth has only exceeded 3% in one year (1996).

Although a modest recovery got underway in 2004, this went into reverse in 2008 and the fall in GDP in 2009 was deeper than in the US or Europe. Japan is still grappling with structural difficulties, including an ingrained habit of thrift on the part of households.

It was not until 2006 that the annual rate of consumer price inflation returned to positive territory, but in 2009, deflation returned and prices are likely to continue falling in 2010-11.

Exporting, the traditional strength of the Japanese economy, was badly affected by the global problems in 2009, and fell by almost a quarter. Although the balance of payments remains in healthy surplus, unemployment is historically high (5.2%) and the budget deficit is now a double-digit share of GDP. (In 2006, it was just -1.0 %.)

Source: IMF World Economic Outlook

After a sharp recession early in the 1990s, the US eventually emerged to become the principal engine of global economic growth. During the latter part of the 1990s it was achieving rates of growth of around 4%, a rare event for mature services-based economies.

This boom, which saw output grow by nearly a fifth in the space of just four years up to 2000 was fuelled by the rapid uptake of new technologies in the fields of IT and telecommunications, especially the internet and e-commerce. This in turn laid the foundations for a huge surge in equity prices.

The bubble eventually burst in the spring of 2000, which proved to be the catalyst for the retrenchment of the global economy, as companies around the world cut back sharply on capital spending, especially on IT. This was quickly replaced with another period of above-trend growth, fuelled by tax cuts, low interest rates and the emergence of new debt financing techniques by the financial system.

Much of this was focused on the housing market and personal consumption and a huge asset price bubble and balance of payments deficit built up, which was unsustainable. And when the economy started to slip, it fell quickly and deeply, with the entire banking system at risk. The chastened American consumer spent less in both 2008 and 2009 and unemployment edged up towards 10%.

The unprecedented policy loosening (fiscal and monetary), however, should ensure that the recession ends by Q4 2009 and a recovery, based on exports and investment gets underway in 2010.

It became apparent during the 1990s that Europe was facing difficult structural problems. All the region’s major economies (with the exception of the UK) endured a recession in 1993, and thereafter growth remained lacklustre until 1998.

In stark contrast to the US, growth was significantly slower during the 1990s than in the 1980s, while unemployment rates remained high, giving rise to the notion of “eurosclerosis”. Despite a plentiful supply of unemployed workers and low interest rates, it was not until 1999 that the major continental economies were briefly kick-started into life by the devaluation of the euro and a surge in exports.

Source: IMF World Economic Outlook

The principal problem for the European economies was the weakness of Germany. As the world’s third largest economy, it accounts for more than a fifth of the EU-15’s total output. After the boom which accompanied reunification in 1990, growth has been mostly sluggish, averaging under 2% a year in the period up to 2005, the inherited problems of the under-performing East holding back the economy which was once the powerhouse of Europe.

Italy and France have also had several years of poor growth since 2000 which in 2009 turned into recession. Both have balance of payments deficits (Italy bigger than France) and budget deficits (France bigger than Italy), and unemployment is uncomfortably close to 10% in both.

Over the last decade as a whole, only the UK and Spain among Europe’s major economies have come close to matching the rate of expansion for the group of advanced economies as a whole but, as the bust which followed the boom showed, the robust growth was not based on very secure foundations.

The outlook for the eurozone is the least optimistic amongst the economies of the developed world. Germany, with its strong export base, is best placed to take advantage of an upturn in the world economy but elsewhere the effects of the fiscal stimuli introduced in 2008-9 will start to fade in 2010. With public sector budgets stretched, unemployment above 10% and investment intentions weak it is not clear what will spark growth.

Source: IMF World Economic Outlook

In the developing regions, rates of economic expansion in Asia continued to be far in excess of those in other areas throughout the 1990s.

There was, nonetheless, a marked improvement in the economic conditions in the major economies of Latin America, which had been bedevilled by political instability and hyperinflation during the 1970s and 1980s.

The countries of the Middle East region remain highly dependent upon fuel exports and on the world market price for oil. Since this market can be extremely volatile, growth rates often vary wildly from one year to the next.

Despite the progress that was made during the 1990s, developing and emerging countries still had a tendency to experience sporadic and spectacular economic crises.

The most noteworthy of these were Mexico in 1995, east Asia in 1997, Russia in 1998, and Argentina in 2001.

Their causes were varied and complex, and included both bad luck and bad management. It remains the case that developing economies, by their very nature, are more prone to adverse economic shocks, not least because of their less sophisticated financial systems.

Yet in the past five years, the vulnerability of many emerging economies has been greatly reduced by the accumulation of sizeable foreign exchange reserves.

Source: IMF World Economic Outlook

China has now become an important engine of growth, not just in Asia but at a global level. It has achieved extraordinary expansion over the past 25 years, and was virtually unscathed by the Asian crisis of 1997 and by the general slowdown in 2001. Even during the current global recession, China has managed to sustain positive growth, of 9.0% in 2008 and 8.1% in 2009, a remarkable performance.

This has been based on China’s role as the world’s dominant manufacturing nation and the 25% annual growth of investment spending (and only slightly less of exports). As export growth slowed, domestic demand expanded, particularly government consumption and infrastructure spending.

Even though Hong Kong and Macao have been reincorporated into China, international organisations still treat them as separate economies, with the IMF including Hong Kong SAR in the grouping of advanced economies. Even excluding these new add-ons, the IMF reckons that China now accounts for more than 15% of global economic activity measured on a PPP basis.

In that case, if it achieves annual growth of 10%, as it has been doing recently, it adds around 1.5 percentage points to the world’s rate of economic growth. In other words, in the past few years, China alone has accounted for roughly a third of the world’s economic expansion.

The other major economic story of the past few years, apart from the rise of China, has been the emergence of India. For several decades, following independence from Britain, the Indian economy under-performed relative to its neighbours in south-east Asia.

A more benign climate for foreign investment, allied with the globalisation of IT and call centre services, have propelled India to unprecedented rates of economic growth. Annual GDP growth broke through the 7% barrier in 2003, and then topped 9% in both 2005 and 2006.

Government spending is helping GDP growth on track (6%-7%) but inflation is above 10% and the budget deficit has reached 7%.

Taking a long view, the rapid expansion of both China and India can be viewed as a unique phenomenon. At times in the past, both China and India would have ranked as the world’s biggest economies.

But for the past two centuries the axis of global economic power has sat somewhere over the north Atlantic, with growth and prosperity dominated by North America and western Europe.

Many countries have undergone a process of industrialisation in the past 50 years, beginning with Japan, which achieved growth rates averaging around 10% throughout the 1960s.

Their example was later followed by the likes of Korea, Taiwan, Malaysia and Thailand. But adding all these countries together, their combined populations wouldn’t come to much more than 300 million.

But with close to 2.5 billion people living in India and China (more than a third of the world total), their rapid expansion is lifting people out of poverty in unprecedented numbers.

The impact on the global economy has already been profound. In recent years, the prices of many goods and of some services, have fallen on account of supply being shifted from traditional locations to India and China. In both countries, many millions of people are now enjoying living standards on a par with advanced economies.

If the process continues at anything like its present pace for another decade, the difference in terms of living standards, health, nutrition and life expectancy will be enormous. If China were to sustain growth averaging 8% a year until 2020, it would be close to the size of the US economy in PPP terms.

In the developing Asian economies, other than China and India, the Asian crisis of 1997 caused GDP to contract by more than 5% in 1998. The brunt was borne by the “Asian tigers” in the south-east of the region.

This pattern was repeated during the slowdown of 2001, on account of the dependence of the Asian ‘tiger’ economies on demand from America. As the US flirted with recession early in 2001, growth rates slowed sharply, especially in the four newly-industrialised economies (Korea, Hong Kong, Singapore and Taiwan).

Source: IMF World Economic Outlook

A key difference between the 1990s and the two preceding decades was the elimination of inflation as a serious economic problem in the major developed countries. From an average for advanced economies of 5.6% during the period from 1981 to 1990, in the years from 1991 to 2000 the annual average rate dropped to 2.6%.

Source: IMF World Economic Outlook

The fact that lower inflation was not, at least in most cases, associated with slower growth is a measure of the substantive improvements in the functioning and management of major economies.

Most of them have gone at least some way towards reforming their economic structures by taking measures to privatise state-owned industries, curbing public sector deficits, improving flexibility in the labour market, and taking a more rigorous approach to anti-competitive practices by businesses.

Growth of international trade, in services as well as goods, and the increasingly liberal trading environment, have also helped to make many markets more competitive. The globalisation of markets has therefore played a significant role in enhancing competition.

In many advanced economies there has also been an important switch in the balance of power between consumers and producers.

Put simply, customers have become more demanding, expecting more for their money and showing a greater willingness to shop around. This trend has been accentuated as low inflation has become an accepted feature of life.

But changes in technology, market structures and customer behaviour tell only part of the low inflation story. Around the world, there has been a growing recognition that economic stability can best be achieved by targeting inflation.

A number of countries including the US, the euro area, the UK, New Zealand and Brazil, have given their central banks full operational independence over monetary policy.

Managing an economy by adhering to an inflation target may not be the optimal policy in all circumstances, but it has the virtues of being comprehensible to a large number of people.

While low inflation is generally beneficial, there is an important distinction to be drawn between prices which rise gradually and prices which fall.

A general reduction in the level of prices which is anything more than temporary is usually a recipe for severe economic difficulties. The world as a whole has been spared this malevolent phenomenon since the depression of the 1930s. But Japan’s recent experience shows all too graphically the damage which it can cause.

Having been one of the star performers of the global economy for some 40 years, Japan then spent 15 years trapped in a vicious circle of deflation and inadequate demand.

When prices are expected to fall, consumers have no incentive to spend, but rather to make their purchases at some point in the future when prices will be even cheaper. While this might sound a good deal for consumers, it offers no incentives to producers who see profit margins erode as the costs stay the same but prices fall.

At the other end of the inflationary spectrum, hyperinflation is at least as damaging as deflation. It erodes confidence, causing capital to flee overseas, and penalises savers to the advantage of borrowers.

Inflation rates generally are much higher in developing and emerging countries, but have also fallen impressively in recent years. For this grouping as a whole, the average rate of consumer price inflation during the 1980s was a whopping 39%. But by 2000, the average stood at just over 6%, indicative of a substantial improvement in economic efficiency and policy management.

The biggest improvement during the 1990s was in Latin America. The region underwent another bout of hyperinflation in the early part of the decade, with the region’s inflation rate reaching 200% in 1994. But this rate had fallen back to around 8% by 2000.

Unfortunately, a decade of low inflation and economic stability were to no avail for Argentina, which suffered one of recent history’s most calamitous collapses at the end of 2001.

A policy of maintaining parity between the peso and the US dollar eventually caused the country’s economic downfall. At a time when the dollar was riding high, Argentina’s uncompetitive manufacturing sector suffered badly, prompting severe balance of payments problems.