Fin24

World economy in deep trouble

2012-12-03 15:33

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 year.

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 backdrop.

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.

Cliffhanger

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 income group.

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.

 

Comments
  • koos.vandervyver.5 - 2012-12-03 16:27

    Ok, please explain to me. How is it that the human race is the only being that can put a whole planet in dept?

  • Malose-Nyatlo - 2012-12-03 16:28

    One step...bang. Mindless wage increases, everybody but us sees the dark economic tunnel we are headed into.

  • wwrer.ww - 2012-12-03 19:19

    What about the S in BRICS? South Africa.

      jesibelle.krueger - 2012-12-03 20:39

      The "S" you are referring to is regarded as S**T in the world of finance that matters. Eg The Economist has NEVER use the figment of imagination called "BRICS" - even the person who coined the term said it was an absolute joke.

  • jacques.shepperson - 2012-12-03 20:36

    Thats for sure!!! Its going down!

  • diana.gill.18 - 2012-12-03 21:59

    This news is a hell of revelation, what they have been talking recently on every media channel if not about a global meltdown. The fall of the system is inevitable unless they will try and use leverages of cutting off the cost of military (manpower and machinery) maintenance, start winding down their military campaigns over the world and pay more attention to the interior politics.

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