What a difference a year makes. Last August, the global economy stared into the abyss as prospects of a US debt downgrade and an Italian bailout sent stock markets worldwide into a tailspin. Last week, Wall Street reached a four-and-a-half-year high. Even the much-maligned euro is trading strongly.
But none of the renewed confidence can mask fears of a euro zone break up, the US going over a "fiscal cliff" or China's "hard landing". Last week, euro-zone data showed a return to recession that is dragging down Germany, Europe's economic powerhouse. Washington remains deadlocked over debt, regardless of who wins the presidential contest in November. Meanwhile, Beijing struggles to counter slowing growth and quell social discontent. This year's summer is the proverbial calm before the storm.
The autumn promises to be explosive. In mid-September, the European Central Bank will decide on buying Italian and Spanish bonds, which might prevent another bailout. With debts of €300 billion (Dh1.4 trillion), Greece needs the next €33.5 billion instalment of its second €130 billion bailout, otherwise it will go bust. Locked by Franco-German diktat into the iron cage of austerity, the real choice for Athens is between a second debt write-off or a forced exit. Either scenario will alarm investors.
Last Wednesday, the independent US Congressional Budget Office warned that failure to avert a "fiscal cliff" will cut US national output by 0.5 per cent next year. Unless Congress agrees a new debt deal, automatic spending cuts and tax rises due to take effect in early 2013 will push the US into a double-dip recession. In an election year, this will exacerbate the bitter partisan stand-off that paralyses the world's biggest economy.
China's economic reforms are on hold as the ruling regime is in the grip of a once-in-a-decade leadership transition. Lower economic growth will aggravate social tensions and trigger further authoritarian consolidation.
With slowing growth and growing fears over a military conflict with Iran, the elements of a perfect storm are falling into place.
The world is now in its sixth year of economic turmoil. On August 9, 2007, the global "credit crunch" began when European banks admitted that they were drowning in debt linked to US subprime mortgages. Two weeks later, investors started shifting their money en masse out of stocks and shares and into state bonds.
Lehman's demise in September 2008 triggered the first global slump. And when in 2009 Dubai and then Greece faced bankruptcy, the financial storm mutated into a banking and sovereign debt wave that engulfed Europe and practically killed the fragile recovery.
The consequences have been serious. Compared with pre-crisis levels, national output is still down, between 2 per cent in the US and a massive 27 per cent in Greece. As such, the Great Recession of 2008-9 is worse than the Great Depression of 1929-32, except that countries are richer and have welfare systems to cushion the hardest blows.
Direct comparisons with the past are always fraught with anachronism, but if 20th century history has taught us anything, it is that economic hardship breeds social unrest and political radicalisation.
Lower national output, higher unemployment and growing social tensions constitute a volatile mix. With rising inflation and slow or no growth, the spectre of populism haunts Europe and the rest of the West.
The fight against long-term stagnation or a second recession in three years looks increasingly difficult. The central banks of the US, China and the euro zone are ready to throw more money at international markets to calm nerves. But individually and collectively, countries are failing to address the key challenge: how to connect capital to activities that generate growth, employment and social cohesion.
At the root of the continuing crisis is the mismatch between savings and investment. From 1997 to 2007, emerging markets in Asia, Latin America and the Arabian Peninsula built up $10 trillion (Dh36.7 trillion) of foreign reserves that they invested in US and European bonds. This unprecedented savings glut flooded the markets with cheap money that fuelled credit and property bubbles. As these bubbles burst, the mutual benefits for eastern creditors and western debtors turned into a near-deadly embrace. Debt in the West and closed factories in the East have dragged down the world economy.
The task is not simply to regulate finance or reform the public purse, but to build economies that channel saving accounts into production at home and abroad, creating jobs and income that can boost fledgling demand. More mutualised models of global trade, currency arrangements and international finance can help reconnect risk-taking with profit-sharing.
What Europe, the US and China require most of all are political economies that combine growth with sustainability and equality with fairness. All three systems are in need of a complete overhaul. Without better representation and greater participation, citizens will not support the tough economic and social choices ahead.
Five years ago, the crisis seemed limited to banking and property. Today, the world confronts a crisis that necessitates bold measures like debt forgiveness, higher wages (in Germany and China), long-term investment and a wholesale transformation of both politics and business. As the window of opportunity for real reform is narrowing, the world cannot afford another wasted year of inaction.
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