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For These Four Nations, 2012 Is Worse Than the Great Recession

Laurent Belsie

The Great Recession of 2008/09 delivered the worst blow to the global economy since the 1930s. But in a few nations, 2012 is turning out to be worse than 2009 in terms of economic growth. Europe's debt crisis, the general slowing of the world economy, and domestic political troubles have played a role in undercutting 2012 growth for one or more of these four nations. Can you guess who they are?

Global Fiscal Crisis
Sami Sarkis | Photographer's Choice | Getty Images

It's no surprise that 2012 has turned out worse for Greece. It didn't escape the 2009 downturn, the economy contracted by half a percentage point. But unlike most of the rest of the world, which rebounded the following year, Greece has continued to shrink — 5.4 percent last year and an estimated 5.2 percent this year, according to projections from the Organization for Economic Co-operation and Development (OECD).

In many ways, Greece is the poster child for the debt crisis that has gripped the European Union and a solemn warning to other nations stuck with rising government debt. An unsustainable debt load has caused interest rates on Greece's sovereign debt to soar and forced it to seek a bailout and a debt restructuring. In return for the help, the European Union, the International Monetary Fund (IMF), and the European Central Bank have forced successive Greek governments to make huge and unpopular spending cuts, the latest one announced Aug. 1, 2012, for 11.5 billion euros ($14.1 billion). Even with the spending cuts and debt restructuring, Greece's public coffers are nearly exhausted, its industries are uncompetitive, and its economy continues on a downward spiral.

“When the market takes a dim view of your prospects, that sends you down that spiral,” says Tu Packard, senior economist with Moody's Analytics. “It’s punishing, really.”

The situation is so untenable that many analysts believe Greece will have to abandon the euro in the next year or two, create a new currency, and then immediately depreciate it to allow its workers to become competitive. But in the process, living standards of the Greek people would plunge.

While not foundering as badly as Greece, Portugal is also a bailout country with high debts and a shrinking economy. In the depths of the Great Recession, it’s economy shrank 2 percent. This year it’s on track to decline 3 percent, according to the OECD.

Still, Portugal is doing what other European nations wish Greece would do. It is taking the difficult steps to return to growth. It has cut its 2010 government deficit by half in 2011, cut government workers, and this year reduced public-sector pay by 14 percent, earning praise from the IMF for largely meeting its commitments to reform after receiving a bailout last year.

Its success is by no means assured. Unemployment has soared to a record 15.2 percent and tax revenues have fallen, which will make it difficult for Portugal to make this year’s budget target. Its much larger trading neighbor, Spain, is struggling with its own sovereign debt problems that have clouded its economic future. But Portugal is likely to start growing again far sooner than Greece.

India is at risk of becoming the first of the BRIC nations — the collection of fast-growing emerging markets that also includes Brazil, Russia, and China — to have its credit rating reduced to junk status.

Just a year ago, India’s government expected double-digit growth in fiscal 2012, just as it experienced even during the worst of the Great Recession. Now, it’s forecasting only 6.8 percent growth — and even that may be too optimistic. High inflation, high interest rates, and a poor monsoon season, coupled with a political crisis that has brought the government to a standstill, have caused business, consumer, and investor confidence to plunge.

There's the possibility that India is touching bottom (and it is still growing at a pace that would be the envy of any developed nation). Embattled Prime Minister Manmohan Singh has appointed a Harvard MBA as his new finance minister, cut government subsidies, and opened up supermarkets and the airline industry to foreign investment.

"India does have a modest stimulus and depreciation," says Adrian Mowat, J.P. Morgan’s chief emerging market and Asian equity strategist. "That's probably sufficient for stabilization." He foresees better times ahead, at least for the stock market. On Sept. 14, the Bombay Stock Exchange's 30-share Sensitive Index hit a 14-month high.

This is the biggest surprise of all. The Great Recession cut China’s real GDP growth by a third — down to 9.2 percent in 2009, according to the IMF — before it rebounded. But China this year is growing at an even slower pace: 7.5 to 8.0 percent, according to various estimates.

Much of this decline is deliberate: Beijing tightened lending to try to tame inflation, which was pushing up food and housing prices; now, it’s trying to loosen some of its control to make sure growth doesn’t fall too far. In many ways, China is paying the price for having engineered its recovery from the recession with a huge stimulus. Housing prices have soared. All the loans have created the potential for bad debt.

“You have this credit bubble still hanging over the economy, so that limits the government’s ability to stimulate the economy,” says Todd Lee, senior director of global economics at IHS/Global Insight, an economic research firm in Lexington, Mass.

A growing number of analysts think China’s growth will decline even more as exports fall, especially those destined for recession-plagued Europe. “Things have become more precarious,” Mr. Lee says, but he’s holding to his forecast of 7.8 percent growth this year with a very mild recovery in 2013.