From a cyclical perspective, things look bad for Europe, the US and most of the global economy. My contribution to summer cheer is to note that longer-term local and global economic prospects are likely to be worse than expected. So welcome to boom and bust. Welcome to subdued long-term growth prospects.

The ancient Greeks knew hubris to be one sin the gods will punish. When Gordon Brown, the British prime minister, announced “the end of boom and bust”, Jove must have checked his thunderbolts. Capitalist market econ­omies are inherently cyclical. The private credit system is intrinsically prone to alternating bouts of irrational euphoria and unwarranted depression. Busts play an essential role. They clean up the mess created during the boom by inflated expectations, overoptimistic plans and unrealistic ventures. These become embodied in unsustainable household debt, productive capacity with no foreseeable use, excessive corporate and financial sector leverage and enterprises whose only asset is hope. The correction is painful, even brutal: unemployment rises, as do defaults, repossessions and bank­ruptcies. We entered such a cathartic phase around the turn of the year in both the US and the UK. Continental Europe is not far behind.

If Mr Brown meant by declaring “the end of boom and bust” that government policies would no longer be pro-cyclical, he would have had a case for the first four or five years of the New Labour government. Granting operational independence to the monetary policy committee of the Bank of England was a master stroke. Tight counter-cyclical fiscal policy in the early years of the Blair-Brown administration reinforced macroeconomic stability.

It did not last. During the four years prior to 2008, fiscal policy became relentlessly pro-cyclical. Self-imposed fiscal rules were fiddled or flouted. The European Union’s stability and growth pact rules were ignored. This left the UK, when the crisis hit, in the position that there would have to be fiscal tightening during the sharpest downturn since 1992 if fiscal rules were to be obeyed. Fortunately, the government opted for another fiddle and flout (also known as a rethink of the rules).

Mr Brown and Alistair Darling, the chancellor of the exchequer, have even during the past year played fast and loose with the jewel in the macroeconomic stability crown – the operational independence of the Bank of England – via statements asserting there was room for interest rate cuts.

Financial stability was undermined by thoughtless financial liberalisation, especially in the US and the UK. Light-touch (really soft-touch) regulation permitted an explosion of opaque instruments often held by non-transparent “shadow banking” institutions. The UK was revealed to have no functioning deposit insurance scheme, no functioning lender-of-last-resort arrangements and no special resolution regime for insolvent or badly impaired banks. In the balkanised regulation and supervision regime of the US, no one was in charge; few were even aware of the dysfunctional developments that were taking place.

The result, in both the UK and the US, was overexpansion of the banking sectors, house-price bubbles, unsustainable construction booms and excessively indebted household sectors. It will take two or three years to work off these excesses.

The global increase in the price of commodities relative to core goods and services represents a redistribution of real income from net commodity importers to net exporters. The EU and the US are at the wrong end of this terms-of-trade shock, which also lowers potential output and is inflationary. The terms-of-trade shock took the form of a jump in the headline price level. All this limited the capacity of central banks to act to support demand. For the non-food-producing poor, this terms-of-trade shock is disastrous. In the poorest countries it threatens to undermine much of the reduction in extreme poverty achieved by high growth in China and India.

What relief there has recently been on energy prices is largely the result of a monetary policy-engineered slowdown in emerging markets. Across these markets, strong underlying growth potential was outstripped by excessive demand growth, fuelled by cheap credit and frequently by undervalued real exchange rates. Even in Brazil – the most controlled of the Brics (Brazil, Russia, India and China) – real interest rates are negative and further monetary tightening is required. India is making determined efforts to regain control over inflation, Russia is toying with the idea and China blows hot and cold – but will have to raise rates, appreciate its currency faster or ration credit a lot more tightly if double-digit inflation is to be avoided. The global cyclical slowdown benefits the advanced industrial countries through lower commodity and energy prices, at the cost of more subdued growth of external demand.

Once the cyclical correction in emerging markets has run its course, I expect growth in those countries to resume at rates that are high but no longer stratospheric. The reason is the environmental constraints on growth in these markets. I am not referring to the (massive) contribution of China and others to global warming, but to the local and regional environmental fall-out from unsustainable industrial and agricultural development: increasing scarcity and rising costs of clean fresh water, clean air and soil that is fit for humans. When the last athlete hobbles out of the polluted Olympic Games of Beijing, black-lunged and gasping for oxygen, there is likely to be a reassessment of what is sustainable growth in China. Even totalitarian regimes require, if not the consent, at least the acquiescence of the populace. Double-digit rates of growth are a thing of the past.

One way to boost long-term global prospects is further trade liberalisation. But the World Trade Organisation’s Doha round of negotiations is suspended and on life support. The Old Protectionists – Europe, Japan and the US – have been joined by the New Protectionists – advanced emerging markets wishing to shelter their agricultural and financial sectors and anything else deemed strategic. Of the four Brics, all but Russia (which is not a WTO member) took a leading part in running the Doha round on to the sandbanks.

So how bad will things get? After the slowdown/recession has corrected the excesses of the past decade, prospects for the overdeveloped part of the world are quite reasonable, as long as material aspirations moderate in line with modest prospects for sustained growth in standards of living. For emerging and developing countries at the right end of the commodity boom, the potential for prosperity is there, as long as the resource curse is avoided. For poorer countries at the wrong end of the commodity boom, the combination of the terms-of-trade shock and acute environmental challenge will make life very difficult.

The writer is professor of European political economy at the London School of Economics