After months of rising stockmarkets worldwide, the mini-crash over the past week could be seen as a case of shrewd investors cashing in on gains after heavy losses in 2011. But in reality, falling equities portend a worsening global economic outlook. The three most likely scenarios are years of low growth, a decade of stagnation or a double-dip recession.
We have been there before. In 2010, the world emerged from the most dramatic economic downturn in over 70 years. Dubbed the "Great Recession", the slump of 2008-09 was less severe than the Great Depression of 1929-32 but unprecedented in its global reach and the devastating effect of financial contraction on the real economy.
Throughout 2009, global coordination at the level of the Group of 20 leading economies helped ensure that the recession did not turn into another depression. With growth resuming, early 2010 seemed to mark the start of an enduring global recovery. The first quarter of 2012 feels like history repeating itself.
But later in 2010 the sovereign debt crisis hit Greece, the rest of the euro zone and the United States - whose last-minute debt deal in August 2011 prevented a damaging downgrade. In response to the global turmoil last summer, the world's central banks, led by the US Federal Reserve and the European Central Bank, flooded the international markets with trillions of dollars and euros. The unprecedented liquidity injection alleviated the acute funding shortage of the banks that hold the bonds of heavily indebted countries.
This, coupled with further austerity programmes aimed at slashing budget deficits, calmed the jittery nerves of global investors. Following last December's agreement to save Greece by writing off over half of its debt, the ECB made available over €1 trillion (Dh4.8 trillion) in cheap loans to stricken banks. Little wonder that global stock markets have soared by about 15 per cent in the first three months of 2012, with some US and European bank shares nearly doubling their value.
But last week's disappointing data on jobs and national output raises doubts about the strength of the US recovery. Likewise, Spain's rising debt cost suggests that the euro-zone crisis is far from over. The main reason for the latest market concerns is that the effect of central bank activism is wearing off and exposing the underlying structural problem - the mutual dependence of heavily indebted countries and overexposed banks. What has kept both afloat is electronically created money, not a significant rise in real investment and consumption.
This exposes the frailty of the recovery in the West. Europe is no longer in denial about its debt problem, but the euro-zone crisis that now threatens to engulf Italy and Spain remains unresolved, particularly the trade imbalances and productivity differentials between the core and the periphery countries.
Across the Atlantic, official unemployment has fallen from 9.2 per cent last year to 8.3 per cent, but the US economy is stuck in a bad place with growing deficits and an alarming rate of job losses. In less than two years, it has lost 9 million jobs and has only created 3 million new ones. Unemployment would be in the high teens if it included all those who have stopped looking for work, who are doing low-skilled, low-paid jobs, or who are working part time.
As in Europe, the US financial markets are increasingly disconnected from the real economy. Certain businesses are doing well, which means that stocks go up even if other sectors are mired in recession.
The West's precarious predicament shifts the focus even more to China's economy. The trouble is that China exhibits growing signs of a "hard landing", notably credit and property price bubbles and growing trade deficits. In February, Beijing recorded its biggest monthly trade deficit since 1998, with imports outpacing exports by $31.5 billion (Dh115.7 billion).
While this trend provides a welcome reduction of global imbalances between deficit countries like the United States and the UK and surplus countries such as China and Germany, it looks set to exacerbate the trade and currency wars between Beijing and Washington. With growing intensity, senior US and Chinese officials are trading accusations of "currency manipulator" and "debt addict" - a theme that will dominate the election campaigns of President Barack Obama and his likely Republican challenger Mitt Romney.
Elsewhere, political paralysis or instability will also heighten economic uncertainty, with elections in France in May and the leadership transition in China. Scandals like that of the now disgraced Chinese official Bo Xilai will exacerbate market nervousness.
This, coupled with rising energy and commodity prices, is likely to hit global trade and the economic recovery. Last year saw a broad-based increase in energy and commodity prices, with Brent crude back up to about $120. That has pushed up inflation, squeezed the income of ordinary people, and reduced both consumption and investment.
Emerging markets are buoyed by high energy and commodities prices but they are also vulnerable to sudden downturns in the event of a double-dip recession in Europe. Even the UK, traditionally a safe haven amid the economic storms on the continent, has seen its national output grow by barely 0.1 per cent in the first three months of 2012.
All this suggests that the world economic recovery is largely built on sand. Only investment and innovation that raise productivity and real wages will provide the boost to output and employment on which the well-being of societies worldwide depends.
Adrian Pabst is lecturer in politics at Britain's University of Kent and visiting professor at the Institut d'Etudes Politiques de Lille in France