You and your clients can be forgiven if you have the impression that economies across the globe are slipping underwater. After all, there has been a steady stream of dire news about sovereign-debt problems for several European nations, and China’s powerful economy has shown signs of pulling back.
But most economists say the big picture is not as bleak as it seems. True, they expect global economic growth to slow to about 3% this year, vs 4% in 2011. But economists also contend the global recovery is likely to continue.
Says Doug Porter, managing director and deputy chief economist with Toronto-based Bank of Montreal’s capital markets division: “The U.S., Canada and most of Asia still have decent growth even with uncertainty, oil price spikes and market volatility.”
Most economists believe that 2013 will be better, with global growth picking up to around 3.5%. They assume emerging markets will provide enough stimulus to produce healthy economic expansion.
The depth of weakness in Europe has been a surprise – recession was expected in weak economies such as those of Greece, Spain and Italy, but the northern economies, including Germany, are slowing as well. Nonetheless, economists anticipate some expansion in Europe.
Futhermore, they anticipate that U.S. growth will chug along at around 2%, and there are encouraging signs that the U.S. housing market has bottomed out and is starting to recover. If they’re right, there will be enough global growth to keep most resources prices at profitable levels, a good thing for Canada.
Economists note that some reduction in global growth had been expected this year because China and other emerging countries moved to slow their economies in 2010 and 2011 in order to deal with worries that inflation would get out of control. These slowdowns have been greater than first expected, economists are conceding, but the use of government policy to slow growth is an inexact science and thus overshooting a target can happen.
Although most economists are guardedly optimistic, says Craig Alexander, senior vice president and chief economist with Toronto-Dominion Bank: “There are an awful lot of global risks, and the probability of one of them happening isn’t small.” It’s particularly worrisome, he adds, that so much depends on politics.
How European nations deal with sovereign debt and other economic issues depends almost entirely on politics – specifically, how much belt-tightening individual governments can accomplish.
Stéphane Marion, chief economist and strategist with National Bank Financial Ltd. in Montreal, fears a rise in protectionism in some beleaguered nations due to the mistaken belief that fewer imports will mean more jobs at home. Marion thinks protectionism is also a risk in the U.S., given high unemployment as the November election approaches.
Here’s a look at other risks:
– the u.s. “fiscal cliff.” This refers to a package of tax increases and spending cuts scheduled to take place Jan. 1, 2013, if no credible deficit- and debt-reduction plans have been worked out. Alexander estimates that these would cost about 5% of gross domestic product and would put the U.S. into a deep recession.
Most economists assume that the November U.S. presidential election, regardless of whom is elected, won’t produce a Congress that can agree on a credible plan, given the continued polarization about the right mix of tax increases and spending cuts. Instead, economists expect trimming of the measures to a manageable cost of 1%-1.5% of GDP.
Postponement in dealing with the problem is possible because, as Warren Jestin, chief economist with Bank of Nova Scotia, puts it, international investors remain “enamoured” of U.S. government bonds, allowing Washington “to raise large amounts of money at very low interest rates.”
This means that uncertainty about the eventual solution to the U.S. fiscal cliff will continue to hang over the global economy.
– slowing growth in emerging markets. Jestin thinks further reductions in economic growth in these countries is the biggest risk because they are the drivers of the global economy. Ten years ago, emerging markets needed growth in the U.S. and Europe to fuel their expansion; now, he says, the U.S. and Europe need emerging markets’ demand for U.S.- and Europe-made goods to keep growing.
If Jestin is right and emerging countries keep their economies going, global growth will continue at a good pace.
However, Lloyd Atkinson, an independent financial and economic consultant in Toronto, believes emerging markets still need growth in Western economies. He thinks slowdowns in emerging markets could get worse due to weak demand in the U.S. and Europe.
– european sovereign debt. Weak European governments such as Spain and Italy have to pay about 7% on their bonds. As these countries are in recession, they are going to need more funding and also to renegotiate rates on existing bonds – and, as Marion points out, politics will make that process difficult.
Germany, which will provide much of the funding, wants borrowers to agree to enough austerity to ensure that another debt crisis doesn’t emerge. But a country can’t pay down its debt if it isn’t growing; its debts will rise as long as it’s in recession. So, the borrowing nations want enough stimulus in their economies to keep themselves growing and keep social unrest at bay. It isn’t going to be easy to negotiate the right mix of austerity and stimulus.IE
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