Beware: the business cycle has not been repealed

It is the R-word - not the three Rs, just the one R - and it spells Recession. One of the many lessons of the present East Asian crisis is that when things are going well hardly anyone is prepared to accept the possibility that the good times may not continue. The longer the period of success carries on, the more secure it appears. Most supposed experts are loathe to sound warnings as it makes them unpopular, while those who have spoken out start to lose confidence in their judgement and shut up. A conspiracy of silence ensues, and so when disaster strikes not only does it come as a complete surprise; it is very much harder to cope with because there has been no preparation for it.

In the field of economics the obvious, glaring issue which is not being discussed is the overwhelming probability that there will be another world- wide recession within the next five years. That recession will have a profound impact on relations between the big three economic regions of the world - North America, Europe and East Asia - and it will create great social strains within even rich and successful countries. It may, for example, be the thing that breaks the European single currency apart.

More about that in a moment; how do I know there will be a recession? Of course I don't know - no-one can. But anyone with any knowledge of economic history will be aware of the business cycle - that periods of faster economic growth have always seemed to alternate with periods of slower growth, and that these periods of slower growth sometimes slip into outright recession. Just why such cycles should exist has been the subject of endless study and conjecture. But we don't need to understand the cycle to acknowledge that it exists. If you bought a house in Britain in 1988 you don't need to be an economist to see what a business cycle can do to property prices.

So there will be another downturn. The next question concerns its likely magnitude. The conventional view is that any downturn will be small. In America people talk of "the new paradigm", an expression which I have never quite understood but I think refers to the combination of low inflation, flexible markets and great entrepreneurial zeal that is powering the American economy. My problem with this is that a lot of the arguments about the special nature of US economic performance may be right, but it is still possible for recession to strike. While, looking around the world, I can see some reasons to expect a relatively mild recession next time, I can see more that suggests it may be quite serious.

On the positive side are the fact that inflation world-wide is falling, that there is a new burst of technological advance taking place, and government policies both in the developed and the developing worlds are tending to improve. Thus we have fewer truly stupid, wealth-destroying economic policies than we did 10 or 20 years ago.

But stacked against this are several negatives. The most obvious is that the world seems to be making the transition from a period of inflation to a period of stable prices. In the long-run, a world of stable prices ought to be just as successful in economic terms as one of low inflation - probably more so. But managing the transition is difficult. We have had no experience of this since the early part of the last century following the Napoleonic Wars, except the 1920s and 1930s, a period which was so dreadful that it doesn't bear thinking about. Disinflation can so easily tip into serious deflation and hence depression. It would be astounding if we were to get through this transition without some mistakes of economic policy; we just have to hope that they won't be too serious.

Next, each of the three big regions has its problems. Enough has been said about East Asia to need no further comment. The region has somewhere between three and five years of adjustment ahead of it, and we should not assume that such adjustment will happen in the optimal way.

In North America the key problem is that despite the admirable economic performance the place is still running a large current account deficit and the US has become the world's largest debtor nation. Add to this the fact that US share prices are at exceptionally high levels by historical standards and you can see that the undoubted success has a certain fragility to it.

Here in Europe the problems vary from country to country. The fringe (which of course includes the UK) is in general doing fine, but the core is threatened by socially-divisive levels of unemployment. Further, Europe may well de-stabilise itself by choosing this moment to introduce a single currency. Leave aside the arguments for and against and look at the timing: if you wanted to chose the worst possible moment for an experiment of this sort, this is as bad as you could get. The new currency is being brought in at a time of the highest unemployment since the Second World War and all the uncertainty associated with that - and at the moment when all computers have to be adjusted to cope with the Millennium bug. That bug does matter. Even if the scare stories - that for example 5 per cent of companies will go bust as a result of cash-flow pressures - are mostly wrong, even a few being right will be negative for the world economy.

So what will happen? We are clearly in for some sort of global downturn. I think, balancing the points above, that it will be a middling one, about the same magnitude as the early 1980s and early 1990s recessions, but different in its quality in ways I cannot fully foresee. I guess that the UK will be relatively unscathed, but I am very worried about the impact on Germany and France, societies which seem more and more fragile.

Timing? Here I have a bit more confidence. I think things will canter on quite well, notwithstanding the chaos in East Asia, until the Millennium. And then there will be a flop. There will be some disruption because of the bug, and EMU, if it happens, will generate more. Above all, there will be a sense of anti-climax. People will have a party, then say "phew", pull back their horns, pause in their spending and worry about the future. Once they do that, things could head down quite fast. The R-word would be here.