For now, though, the main story of recovery is in Asia, where China seems to have recovered from its hiccup in the early part of the year, thanks to a vigorous fiscal policy response, and seems like it may regain its prerecession growth rate. India is a similar story. Even Japan is starting to show some signs of life as the world economy recovers and exports start to pick up. Thus, all of the major Asian economies are showing higher levels of industrial production.
For the moment, East Asia seems to be recovering well, with the exception of Japan, where only a significant injection of domestic demand to accompany export recovery can hope to pull the economy out of the doldrums.
The August GDP figures for France and Germany were good news for a European economy that has been struggling over the past year and indicate that at least for the economies in the France-Germany-Benelux core, recovery may be starting. Observers have pointed out, though, that Germany is still substantially below its potential output. France is also substantially below potential output, though not as deep as Germany.
Nevertheless, the recovery process will lag in Europe compared with the the rest of the world for several reasons. First, the fiscal stimulus has been enacted in most countries, but only in France and the U.K. has the stimulus been strong enough to have a perceptible impact on the economy. Second, the economies in the euro zone periphery are still struggling and show little sign of recovery as of yet.
Third, Western Europe's financial system remains exposed to the fortunes of Central and Eastern Europe, where most countries have not begun to recover and where negative GDP and rising unemployment are actually smaller dangers than the highly fragile financial systems. The financial situation of Eastern European countries ranges from unpleasant (Poland and Turkey) to critical (Ukraine).
While a combination of bailout guarantees to European banks and intervention by the International Monetary Fund and private creditors will most likely prevent a financial crisis resulting from CEE defaults, the region still has to go through a period of retrenchment-IMF-directed or otherwise-that will keep growth low and reduce its potential as export markets to Germany and the other Western European economies.
Anatomy of recovery
The other regions of the world economy don't face the difficulties that Europe faces and will experience somewhat faster returns to average growth rates. With the housing market recovering and the fiscal stimulus taking effect, both the US and Canada seem set to start growing again before the end of the year, though in the case of the U.S., unemployment may not peak until well into 2010.
The rest of the world economy will recover sometime after China and before Europe. One important caveat, though, is that China's stable postrecession growth rate will be a mere 9% per year, as much of the growth in the four years before 2009 was fueled by extensive debt buildups in the US, and to a lesser extent in Europe, and was thus unsustainable in the long run.
