After years of stagnation, the global economic situation looks set for an upswing. But while some countries and industries are gradually pulling themselves back up, others still struggle to find some sort of stable ground. What will 2013 bring us? Will the world lift itself out of stagnation? Or will it crash once more? HC UChicago writer Sruthi gives us her predictions on the economy in 2013.
We’re looking forward to: A U.S. jobs growth and housing market pickup
Despite a disappointing outlook in 2012, the U.S. jobs and housing markets show signs of recovery in 2013. The unemployment rate is well off its 10% peak, and the economy is expected to add 173,000 jobs a month, up from this year’s number of 157,000. Overall, consumer debt is shrinking and levels of installment debt are expected to decrease. This combined with low borrowing rates especially for houses and cars will ease the average consumer’s payment burdens. Approximately 1.8 million homes are for sale nationwide, and sales of new homes in November rose to the highest level in over two years. The demand for housing should remain high as the Federal Reserve continues to keep mortgage rates low with its easing program.
While U.S. GDP growth is projected to be moderate, there is increased evidence that the constraints of oil on global growth will diminish. With the development and discovery of shale oil reserves in the United States, there is potential for some global growth coupled with oil supply growth. However, don’t expect a rapid economic rebound in 2013; there are still plenty of areas in the U.S. budget that need fixing.
Things that could go either way: The U.S. fiscal situation and Europe
U.S. lawmakers finally reached an agreement on New Year’s Day regarding the fiscal cliff—the simultaneous expiration of Bush tax cuts and the institution of large government spending cuts. Late that night, the House of Representatives voted 257 to 167 to increase taxes for the wealthy and save the middle class from a tax rise of more than $3400 per household. Economists from the Goldman Sachs Global Investment Research Team have stated that Americans should expect a soft economy early in the year and a 1.5 percentage point hit to GDP growth. The economy will most likely accelerate later in the year as the degree of fiscal drag diminishes and the private sector picks up.
While we may have avoided an immediate recession, Congress will face another hurdle in late February: raising the $16.4 trillion debt ceiling or defaulting on the nation’s loans. Expect another round of party battles over how to best slash the deficit and revise the nation’s budget. President Barack Obama recently stated the “American people are not going to have any patience for a politically self-inflicted wound to our economy, and the consequences of a default could be worse than the fiscal cliff.” Let’s hope for a quick resolution.
While the European crisis has not been resolved and labor markets continue to be in bad shape, the European Central Bank’s actions under President Mario Draghi have created a safety net for Europe. The risk of spillover from the European crisis to the rest of the world will be minor in 2013, but this does not discount the vast room for improvement. High unemployment, deleveraging by firms and households, banking fragility, sovereign risks, and fiscal tightening continue to plague Europe with slow growth. Its GDP is expected to grow only by 0.3% in 2013, limited by fiscal austerity measures. It’ll take some time to tell where Europe is headed, but there is great potential for policy changes to significantly move the global economy over the next year.
Things we’re dreading: The Asian economy stagnates
Growth in China is projected to fall from 7.8% to 6.9% and in India from 5.5% to 4.7%. This global slowdown in the economies we used to value as areas of rapid growth will continue to be driven by structural transformations. As China, India, Brazil, and other emerging countries mature from rapid investment-intensive growth to more balanced models, the recovery we expect in advanced economies in 2013 will be offset by this slowdown. Traditional investment strategies regarding emerging markets will have to change over the next year. China especially, must focus on rebalancing its growth away from investment and exports to domestic consumption, gradually phasing out non-market driven government measures (oil, water, electricity), and supporting private enterprises.There is also speculation of a feud between China and Japan regarding the tiny islands in the Pacific; an escalation could suppress trade in this region resulting in negative implications for the rest of the globe.