The tentative recovery enjoyed by British factories during the summer has stalled and the high street banks are tightening the credit squeeze on households. That, in a nutshell, is the scenario that currently concerns the International Monetary Fund.
Its half-yearly World Economic Outlook (WEO), published today, predicted that the global economy would return to growth in 2010, but that the recovery could be as weak as the shoe-throwing protest aimed at the IMF's managing director, Dominique Strauss-Kahn, at an Istanbul university. The shoe fell well short of its target.
A quick scan of the data included in the WEO explains why the IMF is so cautious. Unemployment is rising fast everywhere, and will reach 10%-plus in the US, Germany, France and Italy next year. Britain, at 9.3%, is not far behind.
Such growth as there is in the west is highly dependent on government expenditure, which has stepped in to fill the gap left by the weakness of private sector demand. The result? A rapid increase in borrowing and debt that will result in an average fiscal deficit of 10% for advanced countries this year.
The enfeebled state of western economies means a greater reliance on China to be the engine of global growth. But the IMF fears, with some justification, that the monetary and fiscal easing that will result in expected growth of 9% next year has led to unsustainable levels of credit growth. As Olivier Blanchard, the fund's economic counsellor, put it, the good news is that a year ago it looked unlikely that by the autumn of 2009 the global economy would be returning to even modest growth. The bad news is that the recovery has so far been dependent on a short-term rebuilding of inventories and on public spending.
"The main short-term risk," the WEO said, "is that the recovery stalls and deflationary forces become entrenched." This could be the result of the inventory upswing running out of steam or because lack of credit chokes the increases in investment and consumer spending necessary for the private sector to resume as the wellspring of growth.
The other immediate risk identified by the fund is of mistakes by policymakers. It fears that central banks and finance ministries might overestimate the strength of recovery and be persuaded to raise interest rates, cut borrowing or withdraw quantitative easing prematurely.