As the year that saw the world's strongest economy brought to the precipice of a default comes to a close, many wonder if 2014 promises any more stability.
Judging by most forecasts, including that of the International Monetary Fund, the global economy may grow by about 3.5 per cent, but confidence in that forecast is subject to more than the usual amount of hedging due to several policy unknowns and uncertainties.
As unemployment in the developed world remains steady and growth in the emerging economies remains hostage to lackluster performance of the industrialized economies, a question mark hangs over economic prospects worldwide.
Start in the United States. The American fiscal battle to reduce the government's deficit or to implement constructive spending could face continued partisan gridlock. Yes, Congress approved a two-year budget in December, but government spending still is hamstrung.
Congress resists infrastructure investment to repair rusting bridges and approves large corporate farming subsidies while cutting unemployment benefits and food stamps, to list only a few examples. The rocky health-care rollout has th ..
This uncertainty reduces corporate confidence and depresses investment, as low-cost debt and corporate cash flow lead to companies buying up shares rather than building new factories.
Five years after the initial downturn, American growth remains subdued, though higher than Europe's, and job creation is stubbornly low. Hopes of stronger export growth are fading, due to economic weakness among major trading partners.
Government spending will remain weak but, because the cuts will be reduced, it will not diminish overall demand as much as it did in 2013.
Most states are no longer cutting budgets, and this will partly offset the federal restraint.Both the eurozone and Japan are expected to grow by from 1 per cent to 1.5 per cent next year, and both face policy challenges.
European banks remain loaded with shaky government and private debt supported by extraordinary measures of the European Central Bank, while Japan must cut back on its expansionary monetary and fiscal policies and implement politically difficult structural reforms in its rapidly aging society.
Political turmoil in Europe's Mediterranean economies could cause further problems. So long as the Germans allow the ECB to continue preventing collapse, however, slow progress is likely.
China remains a major question mark. Its growth of 7 per cent to 8 per cent has been a factor in keeping global demand relatively buoyant and helped raw material exporters in Africa, the Americas and Australia.
However, weak banks, growing social expenditures and tapering of excessive investment, along with labor-force growth slowing toward zero, should mean somewhat slower growth in the medium term.
Most expect 7-per cent growth to continue in the next few years, but anti-pollution measures could restrict energy use or increase costs.
Many major emerging economies, such as Brazil,India and Indonesia, rely on borrowing, as Brazil and Indonesia also do on raw-material exports. If the Fed tapering and China's transition to more sustainable growth happen together, these economies would slow more than the modest growth gains currently projected.
Other developing nations rely either on manufactured or raw-material exports. Both are likely to be somewhat subdued due to China's switching its growth away from resource-heavy investment toward consumption, as well as to the slow growth and aging of rich nations. However, somewhat higher growth is expected this year for most less-developed countries.
If forecasts work out and the rich countries average 2-percent growth in 2014 while the emerging economies average 5 percent, the expected 3.5-per cent overall growth would be a rate similar to what the world experienced from 1995 to 2004, except that this 3.5 percent would be reached by the higher weight of the emerging economies offsetting slower growth of rich nations.
This change shows up clearly in the slower growth of trade. From 1995 to 2004 the volume of rich-country exports grew at 6.4 per cent a year, while from 2012 to 2014 the growth has fallen to 2.9 per cent.
Nonfuel emerging economies once grew at 10.2 per cent a year, but their exports grow only half as much from 2012 to 2014. Imports follow broadly similar patterns. It's true that 2014 shows improvement, with 4.7 per cent for rich exports and 6.7 per cent for the emerging countries. Still, global trade has slowed dramatically, in total and relative even to slower GDP growth.
This slowdown is part of the reason for sluggish job growth in many parts of the world, along with lingering credit problems, aging populations and overall weak demand.
If unexpected monetary or fiscal shocks occur, the downside risks the I.M.F. refers to would appear. Because of excess capacity and unemployment, there is scant fear of inflation despite trillions of dollars of excess liquidity and negative real interest rates. Profit/GDP ratios are at all-time highs.
A sharp decline in stock prices would likely depress global growth, although ownership of financial equity wealth is so concentrated that it isn't clear that significant direct pain would be widely felt. Economists and others debate whether or not the world's sustainable growth rate is falling.
Putting aside hugely relevant environmental concerns, the answer may be that aging populations, slower technical change as expressed in productivity and structural transfer problems suggest that growth is slower for now. Perhaps the rich world will grow more slowly than it did even a decade or two ago, while China and perhaps India also slow.
That leaves many billions of workers and consumers who still may outstrip their recent past, but their weight in total GDP is modest. Unless the rich find ways to grow faster, the world probably will face modest growth for some time, until the weight of the faster-growing emerging economies finally starts to be felt more.
indiatimes.com
Judging by most forecasts, including that of the International Monetary Fund, the global economy may grow by about 3.5 per cent, but confidence in that forecast is subject to more than the usual amount of hedging due to several policy unknowns and uncertainties.
As unemployment in the developed world remains steady and growth in the emerging economies remains hostage to lackluster performance of the industrialized economies, a question mark hangs over economic prospects worldwide.
Start in the United States. The American fiscal battle to reduce the government's deficit or to implement constructive spending could face continued partisan gridlock. Yes, Congress approved a two-year budget in December, but government spending still is hamstrung.
Congress resists infrastructure investment to repair rusting bridges and approves large corporate farming subsidies while cutting unemployment benefits and food stamps, to list only a few examples. The rocky health-care rollout has th ..
This uncertainty reduces corporate confidence and depresses investment, as low-cost debt and corporate cash flow lead to companies buying up shares rather than building new factories.
Five years after the initial downturn, American growth remains subdued, though higher than Europe's, and job creation is stubbornly low. Hopes of stronger export growth are fading, due to economic weakness among major trading partners.
Government spending will remain weak but, because the cuts will be reduced, it will not diminish overall demand as much as it did in 2013.
Most states are no longer cutting budgets, and this will partly offset the federal restraint.Both the eurozone and Japan are expected to grow by from 1 per cent to 1.5 per cent next year, and both face policy challenges.
European banks remain loaded with shaky government and private debt supported by extraordinary measures of the European Central Bank, while Japan must cut back on its expansionary monetary and fiscal policies and implement politically difficult structural reforms in its rapidly aging society.
Political turmoil in Europe's Mediterranean economies could cause further problems. So long as the Germans allow the ECB to continue preventing collapse, however, slow progress is likely.
China remains a major question mark. Its growth of 7 per cent to 8 per cent has been a factor in keeping global demand relatively buoyant and helped raw material exporters in Africa, the Americas and Australia.
However, weak banks, growing social expenditures and tapering of excessive investment, along with labor-force growth slowing toward zero, should mean somewhat slower growth in the medium term.
Most expect 7-per cent growth to continue in the next few years, but anti-pollution measures could restrict energy use or increase costs.
Many major emerging economies, such as Brazil,India and Indonesia, rely on borrowing, as Brazil and Indonesia also do on raw-material exports. If the Fed tapering and China's transition to more sustainable growth happen together, these economies would slow more than the modest growth gains currently projected.
Other developing nations rely either on manufactured or raw-material exports. Both are likely to be somewhat subdued due to China's switching its growth away from resource-heavy investment toward consumption, as well as to the slow growth and aging of rich nations. However, somewhat higher growth is expected this year for most less-developed countries.
If forecasts work out and the rich countries average 2-percent growth in 2014 while the emerging economies average 5 percent, the expected 3.5-per cent overall growth would be a rate similar to what the world experienced from 1995 to 2004, except that this 3.5 percent would be reached by the higher weight of the emerging economies offsetting slower growth of rich nations.
This change shows up clearly in the slower growth of trade. From 1995 to 2004 the volume of rich-country exports grew at 6.4 per cent a year, while from 2012 to 2014 the growth has fallen to 2.9 per cent.
Nonfuel emerging economies once grew at 10.2 per cent a year, but their exports grow only half as much from 2012 to 2014. Imports follow broadly similar patterns. It's true that 2014 shows improvement, with 4.7 per cent for rich exports and 6.7 per cent for the emerging countries. Still, global trade has slowed dramatically, in total and relative even to slower GDP growth.
This slowdown is part of the reason for sluggish job growth in many parts of the world, along with lingering credit problems, aging populations and overall weak demand.
If unexpected monetary or fiscal shocks occur, the downside risks the I.M.F. refers to would appear. Because of excess capacity and unemployment, there is scant fear of inflation despite trillions of dollars of excess liquidity and negative real interest rates. Profit/GDP ratios are at all-time highs.
A sharp decline in stock prices would likely depress global growth, although ownership of financial equity wealth is so concentrated that it isn't clear that significant direct pain would be widely felt. Economists and others debate whether or not the world's sustainable growth rate is falling.
Putting aside hugely relevant environmental concerns, the answer may be that aging populations, slower technical change as expressed in productivity and structural transfer problems suggest that growth is slower for now. Perhaps the rich world will grow more slowly than it did even a decade or two ago, while China and perhaps India also slow.
That leaves many billions of workers and consumers who still may outstrip their recent past, but their weight in total GDP is modest. Unless the rich find ways to grow faster, the world probably will face modest growth for some time, until the weight of the faster-growing emerging economies finally starts to be felt more.
indiatimes.com
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