It has probably been said too many times, but it is worth repeating now. The world economy is at a crossroads. Every major region seems to be at a potential turning point. In Europe, the leaders of the Eurozone are moving slowly toward more integration, while periodically fighting back against new crises. In the United States, slow growth continues, but various forces seem destined to push the economy either toward recession or faster growth. In China, the economy has landed softly, but the next steps depend on the decisions of a new leadership. And in India, the government has attempted to kick-start the reform process just as the economy seems to have stalled. At the very least, the next year will be an interesting one.
In this issue of the Global Economic Outlook, our economists from around the world offer their perspectives on these and other issues. First, Alexander Borsch discusses the Eurozone situation. He notes that, while the crisis appears to have ebbed in the wake of new policies by the European Central Bank, the underlying problems remain unresolved. He suggests that, other than collapse, the Eurozone has four options to move forward. These range from modest efforts to enforce existing constraints to full-scale integration in the form of a political union.
Next, Carl Steidtmann looks at the US economy and notes that the situation is historically unique. That is, never before has growth “been so anemic for so long.” He demonstrates that, historically, such slow growth usually leads to a recession, or sometimes to accelerated growth, but never to simply more of the same. Thus, we appear to be in new territory. He suggests that the economy has been the beneficiary of “luck and resilience” that are likely to be severely tested in 2013. This will be due to a range of factors, including fiscal policy, headwinds from Europe, and risky monetary policy. Consequently, he sees a high risk of recession.
In my examination of China’s economy, I point to evidence that a soft landing is underway. Moreover, I suggest that the current policy regime is likely to modestly boost economic output in the coming months. Yet many questions remain, not the least of which concern the policy choices to be made by the incoming leadership. As such, there is some degree of uncertainty about China’s outlook.
In his article on the British economy, Ian Stewart says that the UK may be turning the corner but not perhaps in the way that many would like. He says that although growth should resume in 2013, the situation warrants concern, given all the remaining problems—both external and internal. He says that “plenty of things could go wrong” and that the UK is headed for a “shaky and tepid recovery.”
In my article on Japan, I indicate that Japan’s economy remains on shaky ground. With severe external headwinds, a highly valued currency, continued deflation, declining real wages, and stagnant consumer spending, Japan is not experiencing a significant recovery. Moreover, the central bank has chosen not to expand its policy of quantitative easing despite falling prices. Finally, a political dispute with China appears to be having a negative impact on the industrial economy. Thus, the outlook for Japan is not especially good.
In his article on India, Pralhad Burli discusses the fact that India’s economy is operating below potential. He says that the outlook for a return to high growth is not especially good. The country faces a number of downside risks, including uncomfortably high inflation, which has restrained the central bank; external headwinds; and an uncertain policy environment. On the other hand, the government has proposed several new reforms that, if enacted, would likely lead to better long-term growth. The problem is that severe political opposition remains. Thus, uncertainty prevails.
Next, I discuss the outlook for Russia. Against the wind of much of the global economy, Russia’s central bank is tightening monetary policy in order to restrain inflation. In the midst of a global slowdown, this is likely to lead to a slowdown in growth. Indeed, there are signs that this is already happening.
Brazil, on the other hand, is moving in a different direction. In my article on Brazil’s economy, I note that the central bank has cut its benchmark interest rate by over 500 basis points in the past year. It has clearly chosen to focus on growth rather than inflation, which remains above the central bank’s target. The outlook, therefore, is for stronger growth next year. The most notable short-term issue is the potential impact of US monetary policy on Brazil’s exchange rate.
Finally, Neha Jain and Satish Raghavendran offer a perspective on the economy of South Korea. At a time when South Korea has achieved an enviable level of affluence, it now faces short-term obstacles to growth. With export demand weakening, the domestic economy is at risk due to excessive consumer debt, accumulated to fund an increasingly consumer-driven economy. Longer term, Neha and Satish point out that South Korea needs to shift the focus of its economy away from manufacturing in favor of services.