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2013-01-04 05:38:38
Nov 21st 2012 | from The World In 2013 print edition
You might think that, six years after the global financial crisis first broke, the downturn would be well behind us and the economy would be humming along. Instead, huge swathes of the world seem to be embarking on a Japanese-style experiment with long-term stagnation.
Europe is the prime example. The euro zone s GDP will advance by less than 0.5% in 2013. Germany and France will barely move forward. Greece will be in recession for the sixth consecutive year; the economies of Spain and Portugal will shrink for the fourth time in five years. So the misery will mount, as will anger with political leaders, reflected in outbreaks of popular unrest.
Yet the truth is there are no good options left for Europe. Opportunities to get ahead of the problem have been squandered. Leaders face an unpalatable choice between a euro-zone break-up, which risks plunging the region into depression, and a deeper union, which would make core countries such as Germany liable for the periphery s problems. The politicians will opt for more dithering. Although the European Central Bank will intervene to force down excessive sovereign-bond yields, helping to buy governments some time, the politicians will again fail to fix the fundamental flaws. That suggests the single-currency zone will eventually split. But not yet: there is sufficient sticking plaster in the euro zone s medicine cabinet to get the euro, battered and bruised, through 2013 in one piece.
America is in better shape, although that is hardly much of a compliment. Its economy will expand by a bit above 2% in 2013, disappointing by historical American standards, yet stellar by current European ones. The immediate challenge will be to negotiate the fiscal cliff a quadruple whammy of expiring tax cuts, automatic spending cuts, an evaporating stimulus programme and a legal cap on government debt all looming in early 2013. The lame-duck Congress will merely leave it to the incoming legislators to sort out. They will probably agree to extend some of the tax cuts, and raise the legal ceiling on government debt. A few of the existing stimulus measures will also be rolled over, including the extension of unemployment benefits.
But the net impact will be a tightening of fiscal policy and, as a result, the heavy lifting required to keep America moving will fall to the Federal Reserve. That means not just keeping official rates near zero, and continuing the so-called Operation Twist, an attempt to nudge down long-term interest rates. It will mean substantial quantitative easing creating money to buy assets. With fiscal tightening at home and a crisis-ridden Europe abroad, the American economy will need all the help it can get.
Cracks will be apparent in China s growth
These headwinds emanating from Europe and America will make it hard for developing countries to gain traction. Emerging-market consumers are becoming big spenders, and output in the developing world as a whole will expand by about 6% in 2013, nearly four times as fast as that in the rich world. But few countries can grow as robustly as they would like when the West is so sluggish. Brazil might manage growth of 4% in 2013 but India, though its growth may edge up to 6.5%, will struggle to regain its former bounce. Which leaves an uncomfortable amount of global hope resting, once again, on China.
The world s second-biggest economy should pick up a bit in 2013, growing by perhaps 8.6%. But that is a far cry from the double-digit annual leaps China has become accustomed to, and will be possible only because of looser monetary policy and perky regional-government spending. Without that support, China would be heading for a stumble something its incoming leaders will be particularly keen to avoid.
Even so, cracks will be apparent in China s growth story, to those prepared to look for them. Keep an eye out for squeezed profits, wasteful investment and factories churning out products they cannot sell. Western firms will still prefer the relatively robust growth in China to the near-stagnation back home, but business there will be tougher than it has been for some years.
Wanna bet?
So where to find a bit of cheer in 2013? Adventurous investors can look beyond the usual markets to a few more exotic places. Libya s economy should surge as the country gets back to business after its civil war. Mongolia s mining boom will be in full swing, as copper production begins at the Oyu Tolgoi mine in the Gobi desert. But if you really want to take your mind off the global gloom, try Macau. Its economy should grow by around 14% and you don t even need a business plan to be successful. Just hit the gaming tables, think of China and put everything on red.
Robin Bew: editorial director and chief economist, Economist Intelligence Unit