The global economy is emerging from a period of strong growth, the likes of which has not been seen since the 1950s and 1960s. That was back in another century, and seemingly in another world, as well.

In the past three years, the volume of global activity has risen by about 5% per year. This is outstanding performance, considering that average annual growth had been running at 3.5% over the four previous decades, but at only 2.2% during the oil shocks. During this period, aside from the inevitable jolts, inflation has remained incredibly modest by historical standards.

However, this picture would be incomplete, or would seem too idealized, if we didn't add that this strong growth has had its downside. It has never stopped feeding bubbles and/or financial imbalances, either domesticóas on some property markets, for exampleóor international, in particular along the China-U.S. axis. When everything was going well, financial markets acted as if this regime of unbalanced growth was robust and sustainable. In this respect, people talked about a new Bretton Woods regime: a "system" where the periphery (that is, a large proportion of emerging Asia) used the central financial system (specifically, that of the United States) to intermediate its savings. This is what Europe and Japan did during the three decades of strong post-World War II growth.

It is part of the logic of this "system" (if it is a system) that the United States generates external deficits and that Asia accumulates dollar-denominated foreign currency reserves. The upshot is an under-evaluation of Asian currencies and compressed long-term global interest rates. However, if growth were to falter tomorrow, these financial imbalances will perhaps seem unsustainable to many observers and investors. They will need to be purged in significantly less favourable conditions, including a weaker dollar and more costly risk premium.

The new Bretton Woods regime might, in this case, not last quite as long as the original, which did not come to an end without damage to the architecture of the international financial system. The recent turbulence seen on the currency markets testifies to the fragility of the "system."

Powerful Phenomena

Apart from financial issues, it is useful to understand what has been happening in recent years if we want to forecast the global economy one or two years hence. Two powerful phenomena have fostered growth: