Nobody needs me to tell them that the domestic and global economies are plowing through heavy weather. For a while this spring the skies seemed to be clearing but now, as Q3 concludes, it looks like maybe this was just the eye of the hurricane. The double whammy of a world-wide credit freeze coupled with rising commodity prices (read: oil) bodes ill for a painless recovery—there is no policy quick-fix to this kind of vicious combination.

Last summer, there was hope that globalization would help contain the spread of economic virus, that the emerging economies could pick up the slack and soften the down cycle. That argument is no longer taken seriously. Indeed, we are seeing just how integrated the global order has become as economists point out that this is the first time in recent memory where the entire world is simultaneously experiencing inflation.

In this issue of World Trade we continue our ongoing reporting on China, focusing on how to get more value from sourcing in that country. Our authors, two McKinsey partners with extensive experience in trade, argue that most multinational companies have barely scratched the surface in terms of the benefits they can derive from China sourcing; “they don’t yet know just how low prices can be,” they write.

In the current economic climate, though, the underlying issue with respect to China’s role as a global player is how it weathers its first significant cyclical downturn as a capitalist. As the Wall Street Journal recently reported, in the wake of falling demand and increased local prices “many exporters and work shops have closed their door.” The cheap made-in-China household goods, clothing, shoes and toys that U.S. consumers have come to take for granted will cost more (and as a consequence the ‘anti-inflation’ buffer that Chinese goods have provided will lessen).

It’s very much anybody’s guess how this economy’s endgame will play out. As I write, Wall Street is officially a bear market but recession remains to be declared. On the relative up side, my source at a leading credit risk insurer reports that they think the media is exaggerating dangers of dire contraction; their chief economist sees recovery beginning in Q1 ’09. 

Meanwhile I’ve kept on my desk the remarks made last November by former Secretary of the Treasury (and Harvard University President) Larry Summers: “In the U.S. today, as in many other countries in the past, confidence will return the first day an official statement about the economy proves to have been too pessimistic.”

As yet, I’ve not heard an ‘unduly pessimistic’ commentary from a public official.