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Tags: Global | Economy | Old | Demons

Global Economy Faces Old Demons in New Year

Sunday, 30 December 2012 02:08 PM EST

Out with the old, in with the new has a fine New Year's ring to it. Unfortunately, the saying does not apply to the global economy: the uncertainty over U.S. fiscal policy that dominated the last weeks of 2012 is far from going away.

That uncertainty, which is causing businesses to draw in their horns, is likely to be reflected in two important December indicators this week - the Institute for Supply Management's manufacturing survey on Wednesday and the jobs report on Friday.

The ISM index probably rose to 50.2 from 49.5 in November, still well below the second-quarter average of 52.7, while the economy is expected to have added 145,000 non-farm jobs after a gain of 146,000 the month before, according to economists polled by Reuters.

The unemployment rate is likely to have ticked up to 7.8 percent from 7.7 percent. That figure is more important than ever since the Federal Reserve promised to keep monetary policy ultra-loose till it drops to 6.5 percent.

Attention is focused on the immediate consequences of a plunge off the so-called fiscal cliff - the combination of tax rises and spending cuts amounting eventually to $600 billion that will be phased in from Jan. 1 in the absence of a deal.

The economy would almost certainly relapse into recession without a solution in the weeks ahead.

Yet economists are also increasingly concerned by the inability of Democrats and Republicans to compromise and what that impasse says about the chances of putting America's public finances on a stable medium-term footing.

"Recent signals from the economy, especially signs of renewed life in the housing market, suggest that a stronger recovery may finally be taking hold. But these encouraging developments could yet be snuffed out by missteps on the fiscal cliff," according to Nathan Sheets, global head of international economics at Citi in New York.

"Similarly, a failure to address the government's longer-term debt-sustainability problems would pose more long-lived risks for the economy - and for the dollar's role as the global reserve currency," he said in a report.



After meeting congressional leaders on Friday, President Barack Obama said he was modestly optimistic an eleventh-hour agreement could be found. But neither side appeared to give much ground.

Sheets said it was only a slight overstatement to say that, if entitlement spending is not meaningfully reformed, the federal debt will eventually become unsustainable almost regardless of what else is done.

Likewise, higher tax burdens appear unavoidable to maintain defence spending and anything approaching present levels of discretionary programmes, he added.

Michael Moran, chief economist at Daiwa Capital Markets in New York, is also uneasy over the thrust of the cliff talks.

He said the debate over tax reform seems to be about redistributing income and subsidising favoured sectors more than about promoting growth.

By the same token, many lawmakers are resisting logical steps to restrain entitlement spending, such as raising the eligibility age for Medicare, the government health insurance scheme for the elderly, or increasing the use of means testing to determine benefit payments.

"Without meaningful tax and entitlement reform, the unsustainable fiscal situation of the federal government will leave a cloud of uncertainty that constrains growth," Moran told clients.



Not everyone is so gloomy, mainly because monetary policy is extremely easy in most countries and markets have rallied, loosening financial conditions.

"In the final analysis, the U.S. is in a much better position to help lead the global recovery in 2013 as many financial and real economic imbalances have been reduced and there is plenty of pent-up demand in the private economy to fuel growth," said Joe Carson, chief U.S. economist at AllianceBernstein.

In London, Paul Mortimer-Lee with BNP Paribas said global growth is at, or close to, the bottom of the cycle. Julian Callow at Barclays Capital reckons that, six years into the financial crisis, 2013 will finally be the year in which tailwinds begin to overcome headwinds.

That would be music to the ears of exporters in Asia, who suffered in 2012 because of sub-par growth in America and the euro zone's debt and banking troubles.

The European drama is in abeyance for now, although a raft of purchasing managers' surveys for December is likely to indicate that several big countries, if not the whole 17-nation single-currency bloc, probably contracted last quarter.

The first indicator of the year from China, to be released on Jan. 1, is expected to show that the official purchasing managers' index for December rose to 51 from 50.6 in November, according to economists polled by Reuters.

That would suggest the momentum behind China's vast manufacturing sector will continue to improve in the first quarter, Peng Wensheng, chief economist at investment bank CICC in Beijing, said.

© 2023 Thomson/Reuters. All rights reserved.

The uncertainty over U.S. fiscal policy that dominated the last weeks of 2012 is far from going away in the new year.
Sunday, 30 December 2012 02:08 PM
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