The Economic Fundamentals of 2013

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The global economy this year will exhibit some similaritieswith the conditions that prevailed in 2012. No surprise there: we face anotheryear in which global growth will average about 3%, but with a multi-speedrecovery – a sub-par, below-trend annual rate of1% in the advanced economies, and close-to-trend rates of 5% in emergingmarkets. But there will be some important differences as well.
Painful deleveraging – less spending and more saving toreduce debt and leverage – remains ongoing in most advanced economies, whichimplies slow economic growth. But fiscal austerity will envelop most advanced economies this year, rather than just theeurozone periphery and the United Kingdom. Indeed, austerity is spreading tothe core of the eurozone, the United States, and other advanced economies (withthe exception of Japan). Given synchronizedfiscal retrenchment in most advanced economies,another year of mediocre growth could give way to outright contraction in some countries.
With growth anemic in mostadvanced economies, the rally in risky assets that began in the second half of2012 has not been driven by improved fundamentals, but rather by fresh roundsof unconventional monetary policy. Most major advanced economies’ central banks– the European Central Bank, the US Federal Reserve, the Bank of England, andthe Swiss National Bank – have engaged in some form of quantitative easing, andthey are now likely to be joined by the Bank of Japan, which is being pushedtoward more unconventional policies by Prime Minister Shinzo Abe’s newgovernment.
Moreover, several risks lie ahead. First, America’smini-deal on taxes has not steered it fully awayfrom the fiscal cliff. Sooner or later, another ugly fight will take place onthe debt ceiling, the delayed sequester ofspending, and a congressional “continuing spending resolution” (an agreement toallow the government to continue functioning in the absence of anappropriations law). Markets may become spookedby another fiscal cliffhanger. And even thecurrent mini-deal implies a significant amount of drag – about 1.4% of GDP – onan economy that has grown at barely a 2% rate over the last few quarters.
Second, while the ECB’s actions have reduced tail risks in the eurozone – a Greek exit and/or lossof market access for Italy and Spain – the monetary union’s fundamentalproblems have not been resolved. Together with political uncertainty, they willre-emerge with full force in the second half of the year.
After all, stagnation and outright recession – exacerbatedby front-loaded fiscal austerity, a strong euro, and an ongoing credit crunch – remain Europe’s norm. As a result, large –and potentially unsustainable – stocks of private and public debt remain.Moreover, given aging populations and low productivity growth, potential outputis likely to be eroded in the absence of moreaggressive structural reforms to boost competitiveness, leaving the privatesector no reason to finance chronic current-account deficits.
Third, China has had to rely on another round of monetary,fiscal, and credit stimulus to prop up anunbalanced and unsustainable growth model based on excessive exports and fixedinvestment, high saving, and low consumption. By the second half of the year,the investment bust in real estate,infrastructure, and industrial capacity will accelerate. And, because thecountry’s new leadership – which is conservative, gradualist,and consensus-driven – is unlikely to speed up implementation of reforms neededto increase household income and reduce precautionarysaving, consumption as a share of GDP will not rise fast enough to compensate.So the risk of a hard landing will rise by the end of this year.
Fourth, many emerging markets – including the BRICs(Brazil, Russia, India, and China), but also many others – are now experiencingdecelerating growth. Their “state capitalism” – a large role for state-ownedcompanies; an even larger role for state-owned banks; resource nationalism;import-substitution industrialization; and financial protectionism and controlson foreign direct investment – is the heart of the problem. Whether they willembrace reforms aimed at boosting the private sector’s role in economic growthremains to be seen.
Finally, serious geopolitical risks loom large. The entire greater Middle East – from the Maghreb toAfghanistan and Pakistan – is socially, economically, and politically unstable.Indeed, the Arab Spring is turning into an Arab Winter. While an outrightmilitary conflict between Israel and the US on one side and Iran on the otherside remains unlikely, it is clear that negotiations and sanctions will not induce Iran’s leaders to abandonefforts to develop nuclear weapons. With Israel refusing to accept anuclear-armed Iran, and its patience wearing thin,the drums of actual war will beat harder. The fear premium in oil markets may significantly rise andincrease oil prices by 20%, leading to negative growth effects in the US,Europe, Japan, China, India and all other advanced economies and emergingmarkets that are net oil importers.
While the chance of a perfect storm – with all of theserisks materializing in their most virulent form – is low, any one of them alone would beenough to stall the global economy and tip itinto recession. And while they may not all emerge in the most extreme way, eachis or will be appearing in some form. As 2013 begins, the downside risks to theglobal economy are gathering force.

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关键词：Fundamentals Fundamental Fundamenta Economic Mental 2013 2012 important surprise average

we face another year in which global growth willaverage about 3%, but with a multi-speed recovery – a sub-par,below-trend annual rate of 1% in the advanced economies, and close-to-trendrates of 5% in emerging markets.

Painful deleveraging – less spending and more savingto reduce debt and leverage – remains ongoing in most advanced economies, whichimplies slow economic growth.With growth anemic inmost advanced economies, the rally in risky assets that began in the secondhalf of 2012 has not been driven by improved fundamentals, but rather by freshrounds of unconventional monetary policy.

Moreover, several risks lie ahead. First, America’smini-deal on taxes has not steered it fully awayfrom the fiscal cliff. Sooner or later, another ugly fight will take place onthe debt ceiling,Second, while the ECB’s actions have reduced tail risks in the eurozone – a Greek exit and/or lossof market access for Italy and Spain – the monetary union’s fundamentalproblems have not been resolved.Third, China has had to rely on another round ofmonetary, fiscal, and credit stimulus to prop upan unbalanced and unsustainable growth model based on excessive exports andfixed investment, high saving, and low consumption.Fourth, many emerging markets – including the BRICs(Brazil, Russia, India, and China), but also many others – are now experiencingdecelerating growth.Finally, serious geopolitical risks loom large. The entire greater Middle East – from theMaghreb to Afghanistan and Pakistan – is socially, economically, andpolitically unstable. Indeed, the Arab Spring is turning into an Arab Winter.

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