Pacific Money

New Hope, Old Problems for the Global Economy

The beginning of the year has been greeted with a degree of optimism. Will lingering issues dampen spirits?

Having avoided a Mayan apocalypse, and delayed a reckoning with a fiscal cliff, global financial markets can take stock of how things are looking for 2013.  Leadership changes in several key economies, ongoing uncertainty about the Eurozone debt crisis, and anemic recoveries in key economies made the world decidedly cautious in previous months.  However, there are now positive signs that point to a slightly brighter start to 2013.

European Central Bank (ECB) Governor Mario Draghi’s pledge to do “whatever it takes” to save the Euro has given a rare (for recent years) sense of space within the Eurozone.  China’s slowdown seems to have bottomed out following a return to infrastructure/investment based stimulus in the country and signs of an uptick in the key property sector.  In Washington, a last minute deal to buy more time in the face of the “fiscal cliff” has offered some respite, and a modicum of hope that begrudging bipartisan cooperation is possible if the pressure on politicians is great enough.

These key developments, combined with an apparent shift in attitude at the Bank of Japan (BoJ) on the subject of more monetary easing as well as a moderate recovery in the United Kingdom, give the initial impression that 2013 is set to be a much better year than 2012.  Leaders across the globe are talking positively. Obama hailed the Washington deal as the “right thing for our country.” In his New Year’s Eve address, Hu Jintao stated that China will work towards shoring up global growth in 2013. 

But it would be foolish to get too drawn into the optimism that is likely to emerge as markets get back to normalcy after the year end period. Both the Washington and Eurozone “solutions” raise serious questions about the ultimate outcome of political wrangling between key stake holders.  In the U.S., Democrats and Tea Party Republicans are slated to continue their serious and heated debates over new spending cuts and raising the “debt ceiling.” All the while uncertainty about the ongoing issue will temper investor sentiment.  In Europe, fundamental disagreements seem certain to reemerge as national politics continue to collide with the post-modern Eurozone, and local economic pain continues to mount in the southern economies.

China’s recovery seems fairly solid, with Purchasing Managers Indices moving in the right direction and optimism about government commitment to supporting the economy remaining strong. Yet even here there is cause for concern. The measures being taken to support growth seem to suggest a return to the old salves of increasingly inefficient investment backed by ongoing monetary expansion and property bubbles risking urbanization.  The problems of rising debt and financial risk combined with environmental degradation are still present. Rebalancing seems to have been put on hold.

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Of course, President Hu’s comments about China bolstering global growth highlight the common misunderstanding about how countries contribute to global growth.  Any country running a trade surplus is not contributing to net global growth, since it by definition using up more global demand than it is providing.  China’s high growth may benefit trade partners with whom it runs a deficit, but this is not the same as bolstering net global growth. Total global exports must equal total global imports.  It is possible that President Hu is in fact predicting that China will run a trade deficit over 2013, but given recent trends this would be surprising.

Despite these doubts being well known and widely held, and despite there being little substance in leaders’ recent remarks, some short-term optimism and “risk on” market behavior seems likely. 

Finally, may I take this opportunity to wish all Pacific Money readers a very happy and prosperous 2013!