Washington - The global economy is on edge - and that's
without the US "fiscal cliff."
Among rich nations, the US outlook remains the least
troublesome. But given a recession in the eurozone and a recent contraction in
Japan, that's not saying a lot.
At the same time, many emerging markets are hurting. India
is likely to log its weakest growth in a decade this year and Brazil's economy
is also sputtering. Luckily, growth in China appears to be firming.
In the United States, the economy faces growing challenges
even without the ongoing political wrangling over the $600bn in government
spending reductions and expiring tax cuts set to kick in at the start of next
The coming week brings a slew of reports expected to show
the US economy struggling. Data on Friday will likely show employment growth
slowed to just 100 000 jobs last month from 171 000 in October, according to a
Reuters poll of economists.
US manufacturing data this week is also likely to suggest a
fourth-quarter slowdown is at hand.
Indeed, some worry the fourth quarter, which has been
affected by the impact of superstorm Sandy, will bring the world's largest
economy remarkably close to stall speed.
"The risk of seeing a negative sign in front of
fourth-quarter GDP is nontrivial, to say the least," said Tom Porcelli,
economist at RBC Capital Markets. Following figures showing consumer spending
fell in October for the first time in five months, Porcelli revised down his
forecast for fourth-quarter US GDP growth to a 0.2% annual pace from 1%t.
European, global morass
The United States' travails come against a troubling global
Europe is still a mess. Greece's latest debt deal quelled
immediate concerns of a financial market meltdown, with terms of the country's
bond buy-back plan likely to be announced early this week. But the country
remains mired in a deep depression, with little prospect for recovery, and not
everyone is convinced it will be able to remain a part of the single currency.
"We expect the euro to come under pressure again soon,
and continue to forecast that the exchange rate against the dollar will tumble
to parity next year as Greece eventually leaves the eurozone," said John
Higgins, economist at Capital Economics in London.
The attention of financial markets has also quickly returned
to Spain, where the economy continues to worsen despite an improvement in
credit market conditions prompted by hopes of eventual help from the European
Central Bank. Spanish retail sales plunged 9.7% in October, pointing to a
further sharp contraction for a country that has been in recession for more
than a year.
The trouble for Spanish Prime Minister Mariano Rajoy is that
ECB help, in the form of purchases of Spanish bonds, will not come unless Spain
formally applies for sovereign aid, a highly unpalatable choice politically.
Still, it is one the government may eventually have to
stomach, as evidenced by its willingness last week to break with a key campaign
promise and forego inflation adjustments for retirees' pensions in order to
meet its deficit targets.
Other global engines of growth also look to be softening.
Not only did growth slow in India and Brazil in the third
quarter, but it braked in Canada as well. China now may be the exception, with
a gauge of factory activity hitting a seven-month high in November.
Hovering over this rather dispiriting global scene,
Washington's bickering appears to be nowhere near over, with both Democrats and
Republicans holding firm to their positions.
US House Speaker John Boehner, the top Republican in
Congress, said on Friday that talks were at a stalemate. In an interview that
aired on Sunday, he dismissed a proposal presented by the Obama administration
last week as "nonsense."
The biggest sticking point is whether to extend low tax
rates on household income above $250 000 established under former President
George W. Bush. Boehner said Republicans still oppose raising tax rates on any
Hopes for a deal now hinge on the growing number of
Republicans in the House, including a handful of Tea Party-backed
conservatives, who have begun signaling greater flexibility than their leaders
in softening their opposition to higher taxes for the wealthy.
Obama is hoping to appeal to more potential renegades to get
a deal to avoid the budget crunch that economists say would tip the economy
back into recession.