As the world economy continues its decline into what more and more economists are calling a global recession, all countries will be affected, some more than others. The questions remain: how deep will it be and how long will it last? Will some countries come out stronger while others tilt into bankruptcy? A global economic meltdown will have consequences for national competitiveness, which the IMD World Competitiveness Center defines as how a state manages its path to prosperity. This is a concept that not only encompasses economic performance, but also the impact on the environment, on quality of life and on economic and social infrastructures.

Global economic growth is estimated to fall to 0.5 per cent this year, down from 3.7 per cent last year and 5 per cent in 2007. Any global gross domestic product growth of less than 3 per cent generally implies a world recession, even if that does not mean that all countries are in decline. The majority of the rich industrialised countries have now entered a recessionary period and the emerging economies, which grew on average 7 to 8 per cent during the past few years, could slow to 3.3 per cent. Growth will be driven mainly by developing Asia. Compared with the contraction in growth of the rich industrialised economies, the developing economies may be better shielded from the global turmoil. But they will feel the pain as the world’s economic engines falter.

In this era of globalisation, with almost all countries integrated into the global economy, the decoupling myth is dead. The emerging markets of China, Brazil, India and others will not be insulated from the downturn in the US and Europe, as many people were predicting six months ago. In fact, the financial crisis is turning out to be much deeper and broader than expected.

In the worst-case scenario, emerging economies will suffer their own full-blown crises. The most vulnerable are those countries and regions that depended heavily on foreign capital (including Hungary, the Baltic states, Turkey, central Asia), or those that have big current account deficits, but all are seeing their credit drying up. Export-dependent nations such as Japan, Germany, South Korea and China will suffer from the contraction in global demand and can only turn towards their own domestic markets or neighbours to pick up the slack.

Many economies are witnessing huge wealth destruction due to falling property values and stock market crashes. The domino effect began with the US subprime mortgage crisis, followed by the UK, Spain and Ireland. Germany and Japan are the most recent victims to fall into recession. The knock-on effects have been felt as far away as Kazakhstan. China has also been hit hard, since many people invested life savings in the stock market and small and medium-sized enterprises are particularly suffering from the credit squeeze.

Tightening credit conditions are also having an effect on consumer spending all over the world. Banks have significantly cut back on their lending and the world’s economies are deteriorating dramatically as banks, companies and households cling more tightly to cash, despite the aggressive loosening of monetary policy and generous fiscal measures. Interest rates are approaching zero in the US, the Bank of England has lowered interest rates to 1.5 per cent, the lowest since its foundation in 1694, and the European Central Bank recently cut rates to 2.5 per cent. Rates are expected to be slashed even further. When standard monetary policy responses reach their limit, fiscal options, such as cutting taxes and increasing public spending, come into play. The only good news is the drop in inflation rates across the world.

The US, Japan, the European Union and China have all spent hundreds of billions of dollars to stimulate the economy. But is there any money left? The US recently passed the $10,000bn debt milestone – there was not enough space on the national debt clock in New York City to display the 13 zeros. The UK is particularly vulnerable, with its high level of household indebtedness (150 per cent of disposable income, one of the highest in the developed world) and a high dependency on the financial sector for jobs. The sector accounts for more than one-fifth of all UK employment, compared with only 6 per cent of jobs in the US, and contributed about 25 per cent of the nation’s economic growth in the past five years. However, the financial sector only contributes about 8 per cent to UK GDP and the services sector remains very dynamic. Consequently, this long-term investment in innovative and, hopefully, adaptable services industries should enable the UK to weather the current turbulence and to emerge stronger in competitiveness after the downturn. Nevertheless, the financial sector will require improved governance that will entail more effective regulation.

Japan’s government debt amounts to more than 170 per cent of its GDP. In Italy it is more than 100 per cent. Spain and Greece are not far behind. And with the exception of Germany, every large industrial economy will run a big budget deficit in 2009. To some extent, government budgets in rich countries have automatic stabilisers to smooth out economic cycles between booms and busts. But in this crisis of a lifetime, these highly indebted countries could see their monetary and fiscal options limited. And big budget deficits and high debt place a heavy burden on future generations. These countries may be looking at a long tunnel of stagnation and vicious debt spiral, suggesting a bleak outlook for their competitiveness.

Surplus countries such as China, Russia and the Gulf states have accumulated enormous reserves via sovereign wealth funds. But the impact of the financial crisis could see a drawing-down of reserves as central banks ride to the rescue of credit-starved banks and companies. Sovereign wealth funds have quickly lost their enthusiasm for bailing out distressed US and European financial institutions. Many governments may now wish to access those reserves, which were saved up for such “rainy days”. Apart from Russia and perhaps Brazil, these surplus countries may pull through this crisis with less damage than those that did not invest sufficiently in their future competitiveness. This means greater diversification of economic activities and investment in social infrastructure, especially in education.

Many of the world’s developing countries will most likely suffer declines in competitiveness due to weakening exports and the drying up of capital. Those in the most dire of straits, such as Hungary, may be rescued by the IMF or may receive funding from cash-rich countries. But in order to reap long-term gains in prosperity, these countries need to increasingly focus on driving their domestic demand and counting less on foreign capital for growth. Sustainability of competitiveness will also depend on how well these countries adopt international best practices of corporate governance, transparency, fair and flexible labour legislation, environmental protection and a stronger societal framework.

There may be winning nations that will find the “right” recipe for growth and competitiveness despite a climate of increased uncertainty and confusion. But it is too soon to make any significant forecasts. The US may prove more resilient than expected. Martin Wolf, the FT’s chief economics commentator, once wrote, “We Europeans are always gloomy about our successes, while the Americans are always optimistic about their failures”. But this will also depend on how long the recession lasts and what form it takes: a “V”, short but already discounted; a “W” or double-dip; or the worst-case “L” that could last much longer.

We may see a historic opportunity for the world’s most important economies to show a united front in the face of this global crisis. Last year’s G20 summit meeting in Washington implied the shift in the balance of economic power to be more inclusive of emerging nations. If the advanced and emerging economies can agree to co-operate and commit to stimulating the world economy and avoid protectionism, this could signal greater openness of the world economy. The consequences would be gains in competitiveness for those countries that decide to “stick together rather than hang together” as Helmut Schmidt, the former German chancellor was fond of saying. These countries could emerge healthier from the global slowdown and benefit from greater sustainability of competitiveness.

Suzanne Rosselet-McCauley is the deputy director of the World Competitiveness Center at IMD